Australian household debt reaches record heights

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Average Australian household debt has quadrupled over the last three decades, according to a new report, with average household debt now sitting at almost $250,000.

According to the latest AMP/NATSEM income and wealth report – Buy now, pay later: Household debt in Australia – average Australian household debt has risen from $60,000 in 1988 to $245,000, after inflation. This is growth of 5.3% above inflation each year, outstripping income growth of just 1.3%.

In addition, the ratio of household debt to disposable income has almost tripled, from 64% to 185% over the same period.

The report cites declining interest rates, low unemployment and a strong economy as the main factors driving Australians to take on more debt, as the impact of average repayments have been cushioned. 

However, for Australia’s most indebted households with a mortgage, the extra debt means that a 2.5 percentage point rise in interest rates would bring mortgage interest repayments to at least 58% of household income, up from the current 42%. These households would need to find an extra $16,615 a year just to cover interest payments, which would increase from $43,926 to $60,541 a year.

For households with a mortgage and a typical level of debt, a 2.5 percentage point increase would mean debt repayments would rise from 16% to 23% of income, taking annual interest payments from $15,464 to $21,687, or an extra $6,223 per year.

Debt levels for first home buyers have risen to 3.6 times their annual disposable income, up from 3.1 in 2004. For the typical first home buyer, a 2.5 percentage point rise in rates would increase interest repayments as a percentage of disposable income from 21.2% to 30.2%, or an extra $8,047 a year.

According to the report, 90% of Australian household debt is being used to buy a home or to build wealth through investing. Of this, 56% of debt is related to a mortgage and 36% is related to investing in rental properties or shares. 

Australian households now have the fifth highest debt levels in the world, with more average household debt than comparable economies like Canada.