Soaring Debt Burden Adds To Rate Rise Pain

Sydney Morning Herald

Tuesday August 1, 2006

Matt Wade Economics Writer

CREDIT-HUNGRY families are on a collision course with the Reserve Bank as household borrowings spiral towards $1 trillion despite rising interest rates.

The Reserve Bank board is expected to opt for a quarter of a percentage point rate increase when it meets today, lifting the standard variable mortgage rate to 7.8 per cent. The outcome will be known at 9.30am tomorrow.

The last time rates were at that level, in early 2001, household debt was $425 billion. Now the burden has ballooned to almost $900 billion, making families more sensitive to rates than ever.

Australians owe $772 billion on housing and $125 billion in personal loans such as credit cards, figures released by the Reserve Bank yesterday showed.

Household debt grew by more than $100 billion in the past year alone, despite widespread weakness in the housing market.

"With Australian household debt fast approaching $1 trillion, a further 25 basis point interest rate rise, on top of the six rises implemented since early 2002, will have a significant cash-flow effect on consumers," Stephen Koukoulas, a strategist with TD Securities, said.

Borrowing grew by 1.2 per cent in June and housing credit was up 1.4 per cent, the biggest rise since April 2004. Housing credit rose by 13.3 per cent in the year to June.

"Borrowing remains strong and if anything is getting stronger," Mr Koukoulas said.

"The credit data have dispelled any doubt about the urgent need for an interest rate rise following [the] RBA board meeting and the strength of borrowing suggests a further move beyond that."

The CommSec economist Craig James estimates 8.7 million Australians will be directly affected by this week's interest rate decision.

"Currently just over 35 per cent of all households are paying off a mortgage, up from 30 per cent of households nine years ago," he said.

The expected 0.25 percentage point rate rise will slash the annual spending power of households by about $2.2 billion.

The Deputy Prime Minister and Nationals leader, Mark Vaile, yesterday appealed to the Reserve Bank board to consider rural families grappling with drought and soaring fuel prices.

"Many farmers and the businesses that rely on primary industry in rural communities have not had a chance to recover and remain burdened with high levels of debt," he said. "An interest rate rise would disproportionately affect these people."

The national average petrol price rose by 0.7 cents last week to 137.3 cents a litre, just 0.4 cents short of the record high registered in June.

Other figures released yesterday showed demand for new homes has been affected by the interest rate rise in May. Housing Industry Association data showed new home sales dropped 10.5 per cent last month to 7605, a 17-month low. It was the third monthly fall in a row.

The "double whammy" of the May interest rate increase and the relentless increase in petrol prices had a measurable effect on enquiries and sales, the association said.

The Big Picture - Page 18

© 2006 Sydney Morning Herald

Back to News Index | Back to Home