Backlash to the debt binge - Sydney Morning Herald 31-5-08Â
AUSTRALIANS are shying away from debt. But while the rate of new borrowing is plunging, the hangover from the debt binge when interest rates were low looms as a significant threat to the economy.
In a sign of a changing economic mood, there is now little enthusiasm for borrowing to fund investment properties.
The yearly growth in credit for investor housing dropped to 9.5 per cent in April. The rate is the lowest level since figures were collected, and a world away from growth rates of 30 per cent-plus five years ago.
But credit rating agencies - tasked with monitoring the nation's balance sheet for international investors - suggest the new austerity could be coming too late.
One concern noted in a study by Fitch Ratings, released yesterday, was that borrowers were using credit cards to prevent themselves falling behind on mortgage payments.
The study said the main threats to the Australian economy were "the country's persistent current account deficits, its high net external indebtedness and its elevated household debt to income burden".
This year, households will spend 10 per cent of their disposable income on meeting interest payments on their mortgage. The burden is double what it was in 1990, just before the country tipped into recession.
Interest rates were then more than 16 per cent, but the average mortgage debt was much smaller.
Separate figures released yesterday by the Reserve Bank showed that borrowers were taking steps to reduce their burden. Borrowing for new housing investment grew at its slowest rate in 16 years.
"The economy is slowing sharply with higher living costs taking toll on consumer borrowing," a CommSec economist, Savanth Sebastian, said.
"The housing market shows no signs of recovering and investors are staying away from the housing market in droves," he said.
The Fitch study underlined the vulnerability of some to rising interest rates and tougher lending standards resulting from the subprime debacle.
The study found the average household has credit card debts worth three months' disposable income. In 2002 credit card debts were equivalent to two months' disposable income. In 1997 they were worth one month.
Fitch's concern about the current account deficit comes because the cost of financing the deficit - by borrowing from the rest of the world - jumps due to the global credit crunch.
Banks and businesses are paying a lot more in international markets to fund local borrowing. But yesterday's figures suggest households and companies are turning away from debt.
The director of economic and market analysis at Citigroup, Shane Lee, said that the Reserve Bank - trying to slow the economy to get on top of inflation - would be pleased by an economic slowdown that looks likely to extend well into the year.
The Reserve's board meets on Tuesday and is considered unlikely to lift rates from 7.25 per cent - the highest level since 1994. However, ANZ economists expect the Reserve to lift rates twice more by the end of the year.
