Australian debt, it’s a worry.

Two to three decades ago, saving a sizeable deposit for a house, saving for a car or a ‘rainy day’ was the cultural norm in Australia. Since then, an overall trend of saving less and spending more has emerged, and today Australians are actually spending more than they have at their disposal. This negative saving correlates with people wanting things ‘now’ and lenders making credit far more readily available.

Graph 1 below shows that the Australian household savings ratio has dramatically decreased over the last 10 years, from a positive high of just under 9% (for every $100 of gross disposable income, $9 was saved) to a negative low of almost 4% (for every $100 of gross disposable income, $104 is spent).  This is a huge turnaround from the savings levels that peaked in the early 1970’s at almost 25% of gross disposable income, and reinforces the view that debt now appears to be a way of life for the average Australian household.

Latest figures from the Reserve Bank (Graph 2) show debt has reached an unprecedented $897 billion in June 2006. This is a massive 100% increase over the last five years, and almost 200% over the eight years since 1999.

Australians now owe $772 billion on housing and another $125 billion in personal loans, of which $36 billion is represented by credit card debt.

Graph 2

Australian Household debt

When viewed in their entirety, these are enormous figures and probably do not mean much until the actual breakdown of debt at an individual level is taken into account.  For example, over the past 5 years, the average amount borrowed for a home loan increased by 43.3% in Victoria and as much as 83.9% in South Australia (see table 1). 

Average home loan (table 1)

Source: Australian Financial Group Mortgage Index (August 2006)

While the increase in median property values may give a sense of security (see table 2), it doesn’t necessarily provide any relief to borrowers, as debt still needs to be serviced. Adding to this concern is the now slowing housing market across most of Australia, which may stymie improvements in a household’s Loan to Value Ratio.

Median property value (table 2)

Source: Real Estate Institute of Australia (June 2006)
In a buoyant economy, borrowers may be able to delicately balance lifestyle and debt successfully, but may be leaving themselves little room for error. With the seventh consecutive interest rate rise in just over four years announced on 2 August 2006, no doubt many will be feeling the pressures of this balancing act more than ever before.  This of course inhibits capacity to save.

Added to the current economic indicators is a change in cultural values and spending behaviors within Australia, with less time being available for wealth accumulation. As generations following the baby boomers leave university with hefty HECs debts, coupled with costs of child care, the increasing shift to private school education, and borrowing to buy a house, retirement planning and wealth accumulation do not seem to have a sense of urgency.

This lack of savings may become most evident as retirement looms, and the prospect of literally running out of money becomes a reality for the unprepared. In this situation, government welfare can lend a helping hand, but will it be enough to meet retirement needs?

It is more important than ever before that households walking the debt ‘tight rope’ are fully aware of their financial situation. To ensure income is being used in the most effective and efficient way possible, professional financial planning advice is an option that should be considered.

A financial planner can help to develop a ‘safety net’, to protect against the impact of a sudden loss of job, illness or the like which could cripple a financial plan. This is where many borrowers are most vulnerable. Wealth protection is a necessity that every household and individual should take into account.

*Disclaimer:  The information contained in this article is of a general nature only. It does not take into account your particular objectives, financial situation or needs. Before making an investment decision, you need to consider, with or without the assistance of a financial adviser, whether the information is appropriate for your particular needs, objectives and financial circumstances.