By Staff Writer
Australia is one of the highest debt-to-income ratios in the world with high ratios across all of Australia’s regions according to the State of the Regions Report 07-08 released at the Australian Local Government Association conference in Darwin.
Produced by National Economics, the report suggests the highest debt ratios are being concentrated in the middle and outer suburbs of the metropolitan areas and the provincial cities which currently have or did have a strong manufacturing base.
“We spoke a lot last conference about the land boom, the borrowing binge and the effect of increased household debt,” said National Economics’ report co-author, Ian Manning.
“[There are] high debt ratios in outer Sydney, Perth, around Melbourne not quite so bad and around Brisbane, so very high debt service ratios in those areas,” he said.
Also from National Economics’ and a co-author of the report, professor Peter Brain described the difference in ratios across local government areas as “horrific when you have places like Baulkam Hills that have debt to income ratios that are around 220 per cent.
He said there are a few other areas with similarly high ratios, especially in Western Sydney.
“It explains very simply why western Sydney collapsed over the last few years. Basically it reached debt saturation. Of course many more regions are facing that prospect because there debt-to-income ratios are coming up to where some of the Western Sydney ratios are,” he said.
According to Professor Manning, one area where there is a “remarkably” low ratio is the ACT.
“And that could be because the land boom didn’t take off quite so much there but the ACT Government had a much more successful land/banking policy than anybody else,” Professor Manning said.
“Another one until very recently was Darwin, because once again the land supply was more easily available and people didn’t have to go into debt quite so much, now that has turned around in the last few years.”
The report says the current level and spread of debt has no historic precedent, at least in Australia and the build up is becoming unsustainable.
“The build up of debt and the resulting debt service costs, if current trends continue, will seriously compromise Australia’s capacity to grow real incomes into the future.”
The report says Australia’s real household disposable income is growing at around $24 billion per annum.
“This means that additional debt service costs (repayments plus interest) imposed on households is growing at 18 billion, which will increase with future interest rates increases. Thus the economy needs to absorb 75 per cent of income growth in additional debt service costs in order to grow at current rates.”
What happens next?
According to Professor Manning, one of the possibilities is that household debt will become so that households just can’t service it.
“But, on the other hand it is possible we might be able to manage our way around it, if the Commonwealth government is spritely and sufficiently non-ideological in dealing with its poisoned chalice that it has just inherited.”
Professor Manning suggests encouraging inflation could be a positive step.
“A nice big boost of inflation is a real good idea – in other words to [increase] nominal incomes and nominal prices up so they catch up to the land price and the housing price. If you have a serious imbalance in your pricing system then quite often inflation involved to fix it.”
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