With house prices solid or rising everywhere except in Sydney, household debt is now almost out of control.
In the late 1980s and early 1990s, you saw the highly-geared Business sector collapse as interest rates rose. But now, you’re finding it is households with the high levels of debt.
In 1990, households had (on average) borrowed only 65% of their disposable income. By 2005, that figure had rocketed to 155% of their annual disposable income. And today, it stands at nearly 170%.
How has this come about?
In dollar terms, these 17 years have seen household debt increase eight-fold … from $125 billion to about $1 trillion today.
Home Mortgage rates in the 1980s peaked at 18% pa. But, as they gradually declined to around 5.5% in 2005, what you saw was people simply borrowing more — rather than relishing the chance to actually boost their savings.
Therefore, as home mortgage rates have quietly risen to their current level of 7.5% pa … that has effectively meant a 36% increase in monthly mortgage repayments. To the point where debt servicing now represents about 12% of annual disposable income.
At that level, it is already higher than for the last interest rate peak in the late 1980s — when debt servicing stood at around 10% of annual disposable income.
However, do you realise the really scary part in all this? So far, we haven’t yet reached the peak in this interest rate cycle.
Therefore, if you haven’t done so already … make sure you fix your interest rates for the next 3 to 5 years, if at all possible.
That way, you’ll at least be able to sleep well at night. And won’t put your Investment strategy at risk.