By the end of 2018, Australia had, relative to the size of its overall economy, one of the highest levels of household debt in the world. At 127% of gross domestic product (GDP), our household debt, as a percentage of GDP, had nearly doubled over the last 20 years.
So are Australian households groaning under the weight of oppressive levels of debt? For the most part the answer is no. A major reason for the increase in household debt is that interest rates are much lower than they were 20 years ago, so it’s easier to service larger loans. And over 90% of our household debt is owner-occupied home loans and investment loans.
Good debt, bad debt
Home loans and investment property loans are often referred to as ‘good’ debt because, when used responsibly, they (usually) improve wellbeing and build wealth over the long term. That said, poor choices or unfortunate changes in circumstances – borrowing too much, loss of a job or an increase in interest rates for example – can see ‘good’ housing debt turn ‘bad’.
Another type of bad debt is lifestyle debt. This has a negative impact on wealth because the debt is being used to buy things such as cars and clothes, holidays and groceries – that lose value rather than gaining it. In today’s world, it’s easy to accumulate bad debt.
Credit cards, digital wallets on our phones, payday loans and buy-now-pay-later options all make it easier to spend money, even if it’s money we don’t have. Relentless, targeted advertising, the fear of missing out, the increasing level of peer pressure enabled by social media or just paying for daily essentials are all capable of leading us into spiralling debt.
Is debt consuming you?
Some warning signs that you have a debt problem include:
How to deal with your particular debt problem depends very much on personal circumstances.