Increase Household Debt Levels At Australia

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Increase Household Debt Levels
At the end of 2013 total household debt was at a 25 year high of $1.84 trillion, the amount of debt owed by households was nearly 1.8 times the amount of disposable income earned by households in that year, (ABS 2014). This significant rise in debt taken on by Australian households can be attributed to favourable macroeconomic conditions and historically low rates of interest and inflation, (Meng, Hoang & Siriwardana 2013).

Favourable macroeconomic conditions:
Prior to the Global Financial Crisis Australia experienced strong economic growth, low levels of unemployment and strong growth in both the housing and share market. This was due to the mining boom and strong demand for Australia’s commodity exports.
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This can be seen through the fisher equation when nominal interest rates are low and inflation rates are low, households are able to borrow more at the same level of repayment costs. This leads to an increase in the average size of new housing loans. The current ‘borrowers market’ along with the governments first home buyers scheme and the vast availability of finance has meant that their has been an increase in the number of first home buyers acquiring debt, therefore increasing household debt levels, (Sheehan 2014).

Risks of high household debt levels
Australian households:
(McGrath 2014), suggests that high levels of household debt result in Australian households being more susceptible to changes in interest rates, changes to household income and other economic shocks. For example if the Australian economy experience a rise in the level of unemployment or a reduction in the level of wages, households with high debt levels will be unable to finance their debt and will eventually default on their loans. This results in consumption spending becoming more sensitive to changes in expectations about future income, resulting in greater levels of uncertainty, (Joye 2014).

Additionally because the majority of household debt in Australia is linked to variable rates, rather than a fixed rate of interest, households a more susceptible to unanticipated changes to the
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