There has been considerable media coverage, parliamentary debate and public discussion about the debts during the recent years. Much of the research has been on government debt levels and government debt which have been well covered. Governments, however are not the only sectors contributing to the Australian economy.
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This paper will analyze the reasons as to why the Australian households have taken on so much debt. The general risks that such high debt levels pose for the Australian economy and the Australian households. Lastly look on how the operation of monetary policy in Australia has been affected by these high debt levels.
An assortment of statistics is often collected by the Australian officialdom to provide information into the citizens changing lifestyles. For example, the Reserve Bank of Australia (RBA) recently published the disposal income to Total Household debt ratio, which shows total sum of household debt, mainly consumer debt and mortgages such as car loans, credit cards- essentially as a percentage of yearly income after Australian household levies.
In 1977 when the RBA records began, on average, households had debt equal to an approximate one-third of the annual disposal income. The ratio, in 1990 had increased to almost half a year disposal income. Currently in Australia the total household is equal to almost one- and-a-half years of disposable income.
The most significant section of this debt growth can be found with the mortgages, comprising an annual disposal income of 133%. Berry & Dalton (2004) indicate that other contributing factors that have helped drive the growth of the household debts in Australia include:
Financial regulations in many developed nations were more relaxed during the 1980s leading to increase variety and availability of household loan products. Currently trends of risky home loans such as no-deposit loans extensive mortgages are more common. Some lenders now offer home loans with only the interests-with no fixed terms. Home ownership under these loans can look more attainable, but in the long run you end up paying more interests
Lower interest rates are also attributed to the increase in Australian debt since the 1990s associate to a standard reduction on variable housing loan rate from the current six percent to the initial 17 percent in the 1990s. Other advanced economies also felt this trend of declining interest rates, for example, the UK, US, among others.
Controlled supply of urban housing in Australia, in that regulating the housing growth management and housing stock policies such as restricted land release and green belts can increase prices for the houses and thus, the loans incurred for their payments.
Government enticement for example, through grants gained from government promotions allowed for a bigger take-up in mortgage loans by offering the first home buyers a deposit. A trend initially introduced in 1983 and later increased or re-instated over the past three decades. Analysts state that every time it was increased, the outcome was growth in house prices. The negative tax enticement, interlinked with increase in home price, enticed investors into the market, which increased the housing loan and house prices.
General impact of the debts to economy and households
Debts if used in moderation and wisely clearly improve welfare. But, when used excess and impudently, the results can are disastrous. Over borrowing for individual household’s often leads to financial bankruptcy. Too much debt, for a country, can impair the government’s essential ability to cater for its citizens. Economies have been growing, and debts have been rising for years. Without the rise in GDP, there will be no way to increase the governmental revenues necessary to mitigate the explosive debts. These results imply that corporate loans make growth worse mainly during economic stress periods. As the debts increase the chances of a country defaulting on its loan services duty increase, the country loses its political, social and economic power. This makes the debt a national security challenge (Cecchetti, Mohanty & Zampolli, 2011, p. 34).
With the increase in national debt per capita, the chances of the government evading its payments are high and thus the treasury department to get investors will have to increase the yield on newly issued treasury securities. In turn, this reduces the available amount of levies that can be spent on other governmental services since more tax will be paid on the national debt as interest. This change gradually will cause people to experience lower standards of living; it would be hard to borrow for economic enhancement.
The treasury security rates increase and making the corporations be seen as risky investments that need an increase in the new issued bonds. This directly forces companies to raise their prices for goods and services so as to meet the increased costs of their service. Over time, this will affect people since they now will have to pay more due to the inflation.
Effects of high debt level on Australian operation of monetary policy
The influence of non-monetary policy factors on tightness of financial conditions in Australia are increased by the capital market turbulence, as in the increase of debts. As the spread on (OIS) overnight index swaps over bank bills has increased. Bean, Paustian & Taylor, (2010) explained that banks have increasingly passed to their borrowers their higher funding costs by increasing their rates for lending by more than the cash rate increases. Due to the unpredictable nature of these higher spreads. The degree and timing of pass-through of these higher spreads to rates of borrowing have been indecisive; there is greater uncertainty about how tight financial conditions like the high debt levels will be in the near future.
The high debt levels also cause volatility and nervousness in the stock market which has led to many investors losing large amounts of money. There is a significant impact on property as losses have resulted in many investors selling off their valuable properties to recover some of the lost funds on the stock market. This results in a forced pressure on house prices due to the over-supply being experienced.
Berry, M., & Dalton, T. (2004). Housing prices and policy dilemmas: a peculiarly Australian
problem?. Urban Policy and Research, 22(1), 69-91.
Bean, C., Paustian, M. & Taylor, T. (2010). Monetary policy after the fall. Macroeconomic
Challenges: The Decade Ahead, 26-28.
Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The real effects of debt. Bank for
International Settlements, Monetary and Economic Department (p. 34).