Australia’s Household Debt Crisis Looms

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Insolvency,Bankruptcy Australia,Bankruptcy AdviceToday in the news, former economics advisor John Adams advised that Australia is too late to prevent an ‘economic apocalypse’ despite his continual warnings to the political elites in Canberra. He continued to urge the Reserve Bank to raise interest rates to avoid household debt getting further out of control.

This bubble is very simple to express. Confidence! It’s the mistaken perception that Australia’s last 20 years of continual economic growth will never experience any kind of correction is most disconcerting. Australia survived the GFC and a mining boom and bust. Meanwhile, Sydney and Melbourne house prices have not missed a beat or taken a backward step. Regretfully, the decision makers and powerful elite in Australia live in these two cities, and see Australia’s economic challenges through a totally different lens to the remainder of the country. It’s a two-speed economy spiralling out of control.

I acknowledge that this looming crisis isn’t just as simple as house prices in our two largest cities, but the average house prices in these cities are ever rising and contribute considerably to overall household debt. The boffins in Canberra realise there’s an overheated house market but appear to be detested to take on any stern steps to correct it for fear of a house crash.

As far as the rest of the country goes, they have a completely different set of economic concerns. For Western Australia and Queensland particularly, the mining bust has sent house prices tumbling downwards for years now.

Just one of the warning signs that confirm the household debt crisis we are beginning to see is the surge in the bankruptcy numbers throughout the entire country, specifically in the March 2017 quarter.

(source: https://www.afsa.gov.au/about-us/newsroom/media-release-regional-personal-insolvency-statistics-march-quarter-2017).

In the insolvency market, our firm are encountering the devastating effects of house prices going backwards. Although not the fundamental cause of personal bankruptcies, it naturally is a pivotal factor.

House prices going backwards is just part of the dilemma; the other thing is owning a home in this country enables lenders to put you in a very different space as far as borrowing capacity. Simply put, you can borrow far more if you are a home owner than if you are not a home owner. I bankrupt people everyday and the extent of debt differs significantly from the non-home owner to the home owner. Lending is based on algorithms and risk, so I suppose if you own a home you’re more likely to have reliable income and less likely to wind up bankrupt, so consequently you can borrow more. If you own a home in Sydney and Melbourne, you’re a safer risk than if you own a home in Mackay, simply because in one area the median house prices are booming and the other is going backwards, as it’s been doing so for years.

In conclusion, it seems we are running into a wall at full speed, and there are very few people suggesting we slow down. If you want to know more about the looming household debt crisis then give us a ring here at Bankruptcy Advice on 1300 879 867 or visit our website for more information: www.bankruptcy-advice.com.au/

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