Australian households are facing a collective $700 billion cut to their wealth from the need to wind back the massive amounts of debt built up during the property boom.
In a survey of global economies, the giant US investment bank Morgan Stanley found Australia’s economy carried the greatest risk from cutting back on household debt.
“Australia looks most exposed, combining high household and external leverage, weak domestic housing conditions and potential further macroprudential and structural/tax policy adjustments ahead,” Morgan Stanley concluded.
Australia’s predicament is made worse by the need to cut debt occurring during a period of falling house prices and at a time when the household savings rate is a wafer-thin 1 per cent of disposable income.
“Most concerning about the potential impact of a deleveraging phase for Australian households is the narrow savings buffer that is currently carried,” Morgan Stanley commented.
“From the perspective of wealth effects, our forecast 10-to-15 per cent real house price decline would combine with 20 per cent debt/asset gearing levels to inflict a serious dent in net worth.
Morgan Stanley’s detailed 68-page report combines three key measures of household debt — debt-to-income, debt-to-assets, and the debt servicing ratio — to create broad-based global risk indicator.
Alarmingly, Australia is at, or near the top, of all three measures.
“Our Household Deleveraging Risk Indicator suggests that Australia is the economy most at risk of household deleveraging, coming in near the top across all three aspects.
“Leverage and debt-service is high and the second-most externally funded, while falling house prices and slowing credit growth suggest more imminent risks of deleveraging.”