A scenario to consider

The chart below from the latest RBA Chart Pack shows (on the left hand side) the level of debt held by Australian households as a percentage of disposable income. As you can see, debt levels have been on something of a bender for the last few decades. Associated with this, we have seen excellent growth in mortgage books for the big four banks, and a generally chipper residential property market. Australia’s level of household debt is now very high by world standards, and at some point this becomes a problem. Increasing debt is a tonic for economic activity, but there is a limit to how much debt a dollar of disposable income can be asked to service. Our tonic bottle may not have much left in it. This hasn’t been too pressing an issue for Australian households so far, because the RBA has had their back. Since 2011, policy interest rates have been progressively dropped to a record low 2%, and that has meant that interest paid has actually declined in that time, despite the increasing debt. (VIEW LINK)