5-Part Interest Rate Series: Part 3

5-Part Interest Rate Series: Part 3

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Welcome to our 5 part series where we’ll explore the factors that may drive interest rates over the coming year and what you can do to insulate yourself against any changes.

Click here to read part 1
Click here to read part 2

Part 3: Household Debt Level

Welcome to part 3 of our 5 part series where we are exploring the driving forces behind interest rates.

This week we shed some light on household debt levels. You only need to pick up a newspaper to find “Record levels of household debt” plastered across one of the front pages.  It’s a reoccurring theme, but what does it really mean? If our assets are going up in value at the same time then why does it matter?

The chart below paints a scary picture – Household disposable income to debt ratio.

 

You’re reading it correctly; for every $1 of disposable income Australian households have, we now have almost $2 of debt.  Sure, wages have risen modestly since the 90’s but so too has the cost of living.  In fact, the cost of living is now increasing more than wage growth meaning Australians are going backwards.

How does this impact rates?  With the economy crawling along, the concern is that an increase in interest rates will force households to allocate more of their income to debt repayments.  Given our economy currently survives on consumer spending, if a higher percentage of household income is going towards debt it spells trouble for the economy.  For this reason I don’t see a reduction in the cash rate for some time – at least until household debt levels start to decline.  A rise in interest rates would almost certainly be at the whim of the banks.

Lending restrictions imposed by APRA are now having the desired effect, cooling asset prices.  This factor combined with non-existent wage growth puts heavily indebted households at risk.  If you’d like to discuss your debt position and understand your options, contact your accountant or financial planner today.

 

 

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

By | 2018-03-09T11:10:22+00:00 March 9th, 2018|Lending & Finance, Uncategorized|0 Comments

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