Speaking at the FSC Leaders Summit 2017 on Tuesday, Chris Bowen MP, federal member for McMahon and Shadow Treasurer, highlighted that Australia has high household debt levels when compared with comparable western societies, such as the UK and US.
Noting that, at 123 per cent of gross domestic product (GDP), Australia is “now amongst the highest of all advanced nations when it comes to the indebtedness of households a proportion of the economy” (while the average for advanced economies is around 75 per cent of GDP), Mr Bowen said: “Like most comparable countries, household debt increased in Australia in the lead up to the GFC.
“But unlike, say the US and UK, which have reduced their household leverage levels since then, ours has continued to increase strongly over recent years,” he said.
Adding that the US and UK household debt to disposable incomes is now down to 112 per cent and 150 per cent, respectively, Mr Bowen said that “Australia’s household indebtedness has gone in the other direction, with an investor-led property boom playing a major role.”
He added: “We are going against international trends, and in the wrong direction.”
The Shadow Treasurer said that leverage rates are a cause for concern, and are “no doubt something spurred on by tax concessions like negative gearing and capital gains tax which encourages leverage”.
Citing former RBA Governor Glenn Stevens that, when it comes to property prices, “It’s actually the leverage that matters”, Mr Bowen said this was particularly the case for property “because of the sheer size of the housing market, the importance it plays in underpinning the ability of households to spend, and the interconnections between the housing market and the broader financial system – particularly the banks”.
“But it’s also the composition of the property market – investors versus owner occupiers – and how it might behave in the event of a downturn,” he warned.
As such, Mr Bowen said that while he did want to be “alarmist, or overly pessimistic”, he thought a Royal Commission into the financial sector, including a look at the “evolving architecture” of financial and prudential regulation, should be undertaken.
“It is vital that Australia’s regulatory settings are fit for purpose," Mr Bowen said, "and that the changing roles and responsibilities of our regulatory agencies are well understood given the risks that are inherent with a highly indebted household sector.”
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.