Australia's Great Debt Bubble

Financial markets are not as simple to understand as they may appear on face value. There are so many variables and inputs that go into the price of something. Not the least complex is property. There are a multitude of factors that influence the price of property, from supply, demand, immigration, demographics, zoning/re-zoning, rent, lifestyle, fear, greed, ego, and the cost of debt. Especially in Australia, debt is a big one. It has been a large factor in dictating prices.

It's no surprise that as interest rates have fallen since the Global Financial Crisis (GFC), and as lenders have been more willing to lend, borrowers and property purchasers have been more willing to borrow given the lower cost of doing so.

In today's chart we look at Australia's Debt to Disposable Income ratio, which measures the amount of debt Australian's hold relative to their annual disposable income. And it has been rising significantly over the last 40 years - from less than 40% back in 1980 rising to a peak of 187% in 2Q2019. Since then, it has dropped to just under 180%.

As interesting as the red line is, the really interesting thing about this chart is the blue line, which represents interest payments relative to disposable income. At the time Debt to Disposable Income was 40% in 1980, Interest Payments to Disposable Income was 5.7%. As the red line rose during this time, interest to income, the blue line, rose to almost 10% in 1990 - almost doubled in 10 years, it then fell significantly as rates were cut, then rose again to peak at 13.27% in 2008. Since then, it has fallen back to again to levels not seen since 1980.

What's even more interesting, one that isn't plotted in the above chart, and one that no one really talks about, is the value of total assets versus liabilities, which dwarfs household liabilities. Assets to Disposable Income is currently sitting at a comfortable 944% of disposable income, almost tripled from 380% in 1980.

For as long as, and as much as the spotlight shines on part of the data, and for as long as we are told about the numbers that support one side of the story, it's imperative that we look at it from all angles. Sure, there are a number of risks inherent in the property market such as levels of debt, loan-to-value ratios (LVR), interest rates, and so on. There are also a number of risks inherent in any financial decision and markets especially those that are largely dictated by the free market.

Over the last two decades we've seen policy makers and regulators becoming far more involved in markets, tightening and loosening knobs, pulling levers, and pressing buttons aimed at stabilising the pathway and trajectory of not only the economy, jobs, but also financial assets. It's not perfect, it never is, never has

been, and it never will be.

And so while we have record high debt levels, we currently have record low repayments, and record high assets. Having said this, there are of course markets within markets. And what I mean by this is that there are some states, cities, suburbs, and streets that are not in line with the average. There are some that are way out of line, both on the upside and downside, and I think there is very good reason for this. And it's the people who can afford to run their finances at certain levels will continue to support these markets.

Before we form opinions on a certain markets I think it's important that we consider all aspects of the market, because one or two new pieces of information can change the point of view very quickly.