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Economics & Markets

The debt ties that bind us

By Thomas Young
Sydney, Australia

Australia has had years of low interest rates. It follows that mortgagees should have been able to pay off their home loans faster. But it hasn’t happened.

In fact, our soaring mortgages are a key factor behind Australia having the second highest levels of household debt (mortgage debt combined with consumer debt) in the world, after Switzerland according to statistics from the Bank of International Settlements. And it begs the question, why?

Larger loans not larger wages

The key driver is that as the size of our mortgages has increased, thanks to the high cost of housing, wages growth hasn’t kept pace. It means that it’s much harder to pay back a home loan than it was in the past.

The graph below shows that someone who bought a house in 1990 would on average still be spending 21% of their disposable income on mortgage repayments after 15 years of paying off the mortgage. By 2003 this had risen to 27%. Today that figure is a little over 30%

Mortgage repayments on an average dwelling, per cent of median household income

In addition, the buffers in mortgage offset accounts are surprisingly low with more than 50 per cent of loans having less than a one-year buffer, and around 26 per cent having less than one month, which effectively mean they aren’t ahead on repayments.

This situation leaves Australians quite vulnerable to increases in interest rates because we are so highly leveraged, and it is something governments and investors need to be very wary of.

Most at risk

Young families (with parents in the 35 to 44 year old age range) are the most indebted cohort, followed by ‘string betting professionals’, white collar workers aged between 45 and 54 who rely on bonuses and negative gearing to make ends meet, making them particularly vulnerable to an economic downturn.

The next most indebted group are the ‘young pretenders’, who are highly leveraged and often helped out by the bank of mum and dad.

household debt-to-income ratios

As this chart shows, all three groups have higher debt levels than they did 15 years ago. And that’s worrying reading in an economy where interest rates are at record lows.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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