Tuesday 25th September 2007 - 12:28 pm

Debt:The new risk

by Alan Thornhill

There is a hidden danger in Australia’s family debt patterns, according to the Reserve Bank.

But it’s not where you might expect.

The bank’s Deputy Governor, Ric Battellino, made it absolutely clear today that he does not believe The Economist’s famous prediction that Australia’s debt binge will “end in tears.”

But that doesn’t mean that the Reserve Bank is comfortable and relaxed with Australia’s spiralling household debt levels either.

Mr Battelino says Australian families are “running a highly mismatched balance sheet.”

The assets, on that sheet, are mainly property and shares.

The liabilities, of course, are mainly the debt used to acquire those assets.

So what’s the problem?

“This balances sheet structure is very effective in generating wealth during the good economic times,” Mr Battellino says.

“But households need to recognise that it leaves them exposed to economic or financial shocks that can cause asset values to fall and – or – interest rates to rise.”

Mr Battellino frankly admits that the explosive growth in family debt, seen over the past decade or so, is without precedent in this country.

However, he points out that household debt levels did rise sharply in Australia, at least twice previously.

That happened both in the 1880s and the late 1920s.

That, alone, will probably startle some.

Both periods were followed by sharp economic setbacks.

However, Mr Battellino believes the present debt bubble might be more robust.

He says it is misleading to think that it has been driven by struggling young couples, desperate to get their first home.

In fact, he says, most of the debt has been taken out by higher income families, in their forties and fifties.

Those, in fact, who can both afford and sustain the repayments.

Could, they, however, survive a sharp downturn in property prices, set off by a world wide credit crunch?

Some questions, Mr Battellino does not attempt to answer.

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Alan Thornhill

Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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