Personal insolvency rates rise 3 years in row

Statistics released by the Australian Financial Security Authority (AFSA) shows that the rate of personal insolvencies has increased steadily for three consecutive years, growing by 4.4 per cent in 2015–16, 2.1 per cent in 2016–17, and 5.6 per cent in 2017–18.

There were 31,859 new personal insolvencies in Australia in the last financial year, which is the highest annual number since the record of 36,539 was set in 2009–10, according to AFSA.

The largest number of personal insolvencies were seen in Queensland, increasing by 2.6 per cent over the year to 9,235; NSW, where insolvencies rose by 7.1 per cent to 9,118; Victoria, which was the only state to experience a fall of 1.5 per cent in insolvencies to 5,722; and Western Australia, where insolvencies increased by 12.9 per cent to a record high of 4,020.

Meanwhile, personal insolvencies in South Australia reached 1,924 in 2017–18, up by 5.1 per cent over the year, while Tasmania saw a 10.2 per cent increase in personal insolvencies to 799 and the Northern Territory saw a 14.3 per cent rise in personal insolvencies to a record 352.

The Australian Capital Territory remained stagnant at 408 personal insolvencies in 2017–18.

AFSA’s statistics further show that there were 214 new personal insolvency agreements in Australia in the last financial year, dropping by 12.3 per cent from the 244 recorded in 2016–17.

Further, debt agreements rose by 9.1 per cent to an annual record of 14,834 in 2017–18, making it the sixth consecutive yearly rise, according to statistics from AFSA. There were record levels of debt agreements in all states and territories, except Tasmania, in the last financial year.

Bankruptcies similarly increased by 3 per cent across Australia to 16,811 in 2017–18 but remained below the record of 27,520 set in 2008–09.

Consistent with personal insolvencies, the largest number of bankruptcies were seen in Queensland, where the figure grew by 2.9 per cent to 5,013; NSW, where bankruptcies increased by 3 per cent to 4,604; Victoria, which saw a decrease of 5.4 per cent in bankruptcies to 3,066; and Western Australia, where bankruptcies rose by 10.6 per cent to 2,064.

Meanwhile, bankruptcies in South Australia reached 1,138 in 2017–18, a slight increase of 0.6 of a percentage point; while Tasmania saw an 11 per cent increase in bankruptcies to 464; the Australian Capital Territory saw a 5.6 per cent decline in bankruptcies to 186; and the Northern Territory saw bankruptcies rise by 31.7 per cent to a record high of 158.

Quarterly figures from AFSA suggests personal insolvencies could continue on an upward trend. During the quarter ending on 30 June 2018, personal insolvencies hit 8,177, a rise of 7.4 per cent over the same quarter in 2017 and a 3.4 per cent increase from the March quarter.

Bankruptcies also grew by 13.1 per cent year-on-year to 4,398 during the June quarter, while debt agreements rose slightly by 1.5 per cent to 3,724.

Personal insolvency agreements continued on its downward slope in the June quarter, decreasing by 5.2 per cent to 55.

According to AFSA, 17.6 per cent of new debtors entered a business-related personal insolvency in the June quarter this year.

AFSA said that in cases where a specific cause could be identified, “economic conditions” (363 debtors) was the most common business-related cause, while and “excessive use of credit” (2,407 debtors) was the most common non-business-related cause.

Household debt continues to rise

High levels of household debt in Australia have been on regulators’ radar for a number of years, unhelped by subdued income growth and rising house prices and other costs of living, which they fear will have a material impact on the economy through decreased spending.

The problem could be compounded when borrowers of interest-only home loans are pushed into principal and interest contracts, with the Reserve Bank of Australia warning earlier this year that borrowers could be required to pay an extra 30 per cent to 40 per cent (or an additional $7,000 a year) in annual mortgage repayments.

RBA assistant governor (financial markets) Christopher Kent noted that the increase would make up 7 per cent ($120 billion) of the total housing credit outstanding.

Earlier this year, it was also found that approximately 51,500 borrowers could be at risk of defaulting on their mortgages in the coming year, with over 30 per cent of Australians experiencing mortgage stress.

However, National Australia Bank’s chief economist, Alan Oster, previously said at The Adviser’s Better Business Summit that the high level of household debt in Australia is a “liquidity issue” rather than an indication of a looming economic collapse.

His contention was that analysts are fixated on the debt-to-income ratio — which has more than tripled from 64 per cent in 1988 to nearly 200 per cent at the start of January — and are overlooking other aspects of the balance sheet, such as total value of assets which paints a less grim picture of consumer debt.

For example, the official estimate of Australia’s wealth from the Australian Bureau of Statistics exceeded $11 trillion, more than four times the recorded amount of household debt, NAB’s chief economist noted.

He also pointed out that Australia’s net debt — which was $326 billion in the 2016-17 financial year, or an estimated 18.9 per cent of GDP — is low by international standards, despite being high by historical standards. For example, in 2017, Japan’s net debt represented 120.9 per cent of its GDP in 2017, while France’s net debt grew to 96.8 per cent during the same year.

[Related: Arrears on non-conforming loans continue to fall]