Speaking to the PM radio program on Thursday, Fiona Guthrie, the CEO of Financial Counselling Australia (FCA) said that household debt — which now sits well over $1 trillion — was at all-time high in Australia and could have serious ramifications on the economy in future.
Ms Guthrie explained that “mortgage stress” was a major part of the debt crisis.
She commented: “The characteristics [of mortgage stress] are different, probably depending on where you are. So, the mortgage stress in places where mining has left is because people’s homes are now worth less than their mortgages, now that is quite different to the mortgage stress you’ll have in Sydney and Melbourne where people have had to get really, really high mortgages in order to get into the market in the first place.”
Ms Guthrie claims that 30 per cent of Australian households are in some sort of financial stress.
She added that 20 per cent of the population were “really struggling”, and “haven’t been able to make a payment, for example, in the last year or have no cash in the bank if something goes wrong”.
Indeed, the National Debt Helpline says that 14,000 callers were unable to speak to a counsellor in January 2017 because of a lack of staff.
As such, the FCA is calling on both the government and the commercial banks for help.
Ms Guthrie concluded: “We are going to go through a debt hangover in Australia because our household debt is at record highs. Just imagine what happens when interest rates start to nudge up again and/or if unemployment were to increase and people were to lose their jobs. The flow on effects for our economy would be absolutely devastating…
“Because we have so much debt and it’s at such high levels the least little wind is going to tip us into something that could look very like a catastrophe.”
The level of household debt has been under the microscope recently, with Fitch Ratings revising its outlook on the Australian banking sector to ‘negative’ (from stable) due to an increase in macroeconomic risks and high household debt.
Likewise, in November S&P revised its credit outlook to negative for 25 Australian banks, warning of rising risks due to high private debt and residential property prices.
Mortgage stress has also been on the rise recently, with Moody’s Investors Service reporting in October that the proportion of Australian residential mortgages that were more than 30 days in arrears had risen to “the highest level in three years” and would only “continue to rise”.
In November last year, big four bank ANZ said that it would be “more cautious” on lending, after raising concerns over the longevity of strong house price growth and rising underemployment.
The chief executive officer of ANZ, Shayne Elliott, commented: “When you are lending 80 per cent or 90 per cent of the value of a new home — and when you're seeing such volatility in prices (we've been used to them going up at double digit) — it doesn't take a lot for them to construct a scenario where they go down at double digit.
“[So], if you've lent 90 per cent of the value, [then] very, very quickly you can end up under water... So we're a bit more cautious, [we’ve] got to be really careful about that.”
He added: “Secondly, there's been a big transition where people were in higher paying jobs — maybe because of overtime, maybe they were in the mining sector — are now in lower paid jobs. So, their household income is either stagnant, flat, or it's falling. That means that it's a little bit harder for them to keep up with their mortgage payment or whatever payments and commitments they have.
“So, we're just saying, in that environment, let's just be really cautious about who we're lending to. We just don't think it's the right time to be out on the front foot too aggressively.”
[Related: Post-Christmas debt tipped to hit $397m]
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.