Australia’s Household Debt Crisis Looms

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Today in the news, former economics advisor John Adams revealed that Australia is too late to avoid an ‘economic apocalypse’ in spite of his incessant warnings to the political elites in Canberra. He proceeded to urge the Reserve Bank to raise interest rates to prevent household debt getting further out of control.

This bubble is very simple to express. Confidence! It’s the erroneous perception that Australia’s last twenty years of continual economic growth will never encounter any sort of correction is most worrying. Australia survived the GFC and a mining boom and bust. In the meantime, Melbourne and Sydney house prices have not missed a beat or taken a backward step. Sadly, the decision makers and powerful elite in this country live in these two cities, and see Australia’s economic problems through an entirely different lens to the rest of the country. It’s a two-speed economy spiralling uncontrollably.

I concede that this impending crisis isn’t just as straightforward as house prices in our two largest cities, however the median house prices in these cities are ever rising and contribute substantially to total household debt. The boffins in Canberra recognise there’s an enflamed house market but seem to be reviled to take on any focused efforts to correct it for fear of a housing crash.

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

One of the indicators that demonstrate the household debt crisis we are beginning to see is the increase in the bankruptcy numbers over the entire country, especially in the 2017 March quarter.

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

In the insolvency market, we are encountering the destructive effects of house prices going backwards. Although not the primary cause of personal bankruptcies, it clearly is an integral factor.

House prices going backwards is just part of the problem; the other thing is owning a home in Australia allows lenders to put you in a very different space as far as borrowing capacity. Put simply, you can borrow much more if you are a home owner than if you are not a home owner. I bankrupt people everyday and the extent of debt fluctuates greatly from the non-home owner to the home owner. Lending is hinged on algorithms and risk, so I suppose if you own a home you’re more likely to have steady income and less likely to end up bankrupt, so subsequently you can borrow more. If you own a home in Melbourne or Sydney, you’re a safer risk than if you own a home in Mackay, simply due to the fact that 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 need to know more about the looming household debt crisis then get in touch with us here at Bankruptcy Experts Sydney on 1300 795 575 or visit our website for additional information: www.bankruptcyexpertssydney.com.au