Who’s to Blame for Australia’s Record High Debt?

Charlie Munger is one of the investment world’s true characters. He says it like it is and doesn’t care for political correctness.

For those of you unfamiliar with Munger’s work, he’s best known as the chairman of Berkshire Hathaway Inc. [NYSE:BRK]. He’s also the right-hand man to Warren Buffett.

A great example of Munger’s reasoning is his thoughts on the 2008 financial meltdown. In his view, it wasn’t greedy bankers that loan far more to people than they could afford on risky terms that were to blame. Rather, it was the person who created the incentive system for bankers at the time.

Bankers, like many of us, will do what benefits them most. So, if getting as many loans through the door is what increases your take-home pay packet, why wouldn’t you do it?

The same blame should go to anyone who creates a harmful incentive system.

Australia’s record debt levels

So who do you think is responsible for Australia’s record debt levels?

According to The Australian:

Debts across the country have hit a record high of double household incomes and are still climbing, making it difficult for the Reserve Bank to raise rates and increasing the risk to the economy from any downturn in housing prices.

Reserve Bank analysis of the latest national accounts shows debt is 99.7 per cent higher than the total earnings of all households, having risen from 67 per cent greater three years ago. Households are still adding to their debts as new home buyers enter the market for the first time, established homeowners upgrade their houses and investors add to their property portfolios. Housing debts rose $110 billion, or 6.9 per cent, in the year to November.

Low interest rates

Of course, there are many factors at play. But it’s probably not just the Reserve Bank of Australia’s fault. Sure, the RBA kept interest rates at record lows, encouraging potential borrowers. But a lot of the blame also goes to those who set up the incentive system to increase the amount of loans each year.

So, what happens now? Do we continue to accumulate debt until the pressure crushes us?

In my mind, as long as bankers continue to offer extremely low interest rates, debt will continue to climb. There are only property buyers in the market because they can comfortably service their loans by buying and renting it out.

Until interest rates pick up, it’s hard to see a slowdown in household debt.

Cheers,

Härje Ronngard,

Junior Analyst, Markets & Money

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Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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