Greg McAweeney

Results from the 2014 RaboDirect Financial Health Barometer (FHB) have uncovered a national picture about levels and attitudes to debt amongst Australians. According to the research, 23% of people claim to be more in debt than 12 months ago.

Key points

Greg McAweeney, Group Executive RaboDirect, says the beginning of a New Year is the perfect time for Aussies to take stock and get their financial house in order.

He warns that our attitudes to debt may have seen too many of us starting 2015 in the red, especially after the festive season when personal budgets might have spiralled out of control.

“While debt is a fact of life for most people, the way it is managed can mean the difference of being in financial control or being out of control. There are simple tips for ensuring you get on top of your debt and stay out of the red,” says Mr McAweeney.

To stay in the black, he provides the following top five tips:

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Household debts high by international standards.

Australian households have housing debt levels that are high by international standards.

Australian household debt ratios are relatively high by international standards. But there are important economic and legal differences between housing markets that can sustain marked variations in housing prices. In Australia, it is also important to understand the economic and social characteristics of the households that have the debt.

This note uses the considerable amount of research into household financial positions (published by the ABS, the RBA and other groups like the Melbourne Institute’s 2012 Household Income and Labour Dynamics in Australia (HILDA) report) which provide extensive insights into these household characteristics. The data and the surveys show that household debt has increased steadily over 2002‑2010, primarily due to growth in housing‑related debt.

But the data and the surveys also indicate that the households who carry the most debt typically have stable characteristics. On average, these households are couples with good health, high educational attainment, relatively high and stable incomes and in a prime age category. On balance, Australian households are in a good position to service their housing and other debt. The net asset positions of the households are also important in judging their capacity to cope with adverse economic developments.

One of the more interesting recent trends is that households have also increased their housing debt prepayments over 2012 and 2013, by leaving their repayments unchanged while interest rates fell. It is in line with the inclination to reduce housing and credit card debt since the GFC. Combined, these more cautionary shifts provide households with an important buffer to any negative economic shocks.

Some commentary on Australian household balance sheet positions conveys the impression that household debt levels are too high, leaving many households with unmanageable debt servicing commitments. The general line is that a significant number of households are at risk of financial ruin if their economic circumstances, like employment, change adversely. The surveys, and the experience of the past few decades, does not, in our view, support those lines of argument. The experience of the post‑Global Financial Crisis (GFC) period was a “stress test” that indicated the ability of Australian households to cope well with adverse economic developments.

Some of the commentary on Australian house prices, especially from offshore based groups, argues that there is a housing price “bubble” in Australia which will eventually burst and replicate the downward path of US and UK house prices through the 2008 to 2011 post‑GFC period. In our view, the US and UK housing market outcomes reflected the severe recessions and the housing demand/supply imbalances that hit the two economies after the GFC. Fortunately, through good luck and good management, Australia did not have a recession and the most important influence on the housing market’s outcomes, the unemployment rate, peaked at just under 6%. That was significantly below the peaks reached in the US and UK where the rates are moving lower but are still around 8%.

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