Cheap Debt Is Only Fuelling Australian Inequality

The one bedroom apartment in Wollstonecraft, NSW ticked all the boxes.

It faces north, which brings in good natural light. It has a parking spot, storage, and the train station is within walking distance.

So it was no shock when it quickly sold at auction for almost 12% above the quoted price, at $670,000.

Yet the apartment still managed to make the news, and for once, it was not because of the price. The reason: a six year old had bought it.

Well, not exactly. The mother had bought it for her six year old. She feared that at the rate prices are increasing, her daughter would not be able to afford a property of her own by the time she reached 18.

And she was not the only parent at the auction buying for her child. The under bidder — still stunned from losing to a six year old —was there on behalf of his 30 year old daughter.

More silver haired bidders are showing up at auctions, anxious to get their children on the property ladder as soon as possible. They realise that, without their help, their children will never be able to afford an Australian property.

The fact is, low long term interest rates and low salary growth are not helping first home buyers save to buy a deposit.

Australia has the most indebted household to GDP ratio in the world, thanks to inflated house prices. It is currently 125% of GDP. That is, it would take the entire country a year and three months to pay off the amount of debt. 20 years ago it would have only taken half that time.

Our wages are not growing at the same rate as the debt. According to the Bank of International Settlements (BIS), the average Australian household spends 15% of their income to repay debt in the first quarter of 2016. Mind you, this is at low interest rates! This is almost double the amount spent by households in the United States, United Kingdom and Japan.

And the ones who are taking on more debt are the wealthiest households, who are taking advantage of cheap debt to increase their family wealth.

Debt to Income Ratio

If you look at the chart below, the largest increase in debt can be seen in the higher income brackets. As a percentage though, the lower income bracket has doubled their debt.

Households with high level of debt

Source: Natsem

Households with high level of debt have loaded up with even more debt in recent years.

And according to Natsem, most of the debt has been acquired by buying an investment property. And investor debt is highest among the 65+ age group, at about 60%.

But even though high income households are taking on more debt, they are not feeling the stress — yet. This is because interest rates have stayed low. But high income households are now the most at risk from unemployment, an increase in interest rates, or an increase in housing supply.

Australia has had 25 years without a recession, which has caused Australia to become a wealthier country. Yet this time of prosperity has not brought equal wealth to everyone.

According to the study The Wealth of a Nation by the Evatt Foundation, inequality in Australia has continued to increase since 2012. It is now at the highest since 1970. The richest 20% of Australians now own 62% of Australia’s total household wealth.

Much of this increase in wealth has come from rising property prices. And it has come at the expense of the middle income crowd not being able to get into the property market.

As borrowed money keeps on inflating property prices, the divide between the haves and the have nots keeps increasing.


Selva Freigedo,
For Markets and Money

PS: Too much global debt could be the catalyst that ignites the next great crisis of our time.

Yet according to Markets and Money’s Vern Gowdie, we’re already in the throes of this crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that will make the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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