Household Debt to GDP Ratio – Australia Versus the World

Been working my way through the RBA’s February Statement on Monetary Policy (click here). It’s a good read – and presents a picture of a pretty healthy domestic economy.

Still with our housing market continuing to power on – latest gossip is that Australian housing has become the carry trade of choice for Chinese real estate speculation – the question remains how long can we continue to turn up the leverage?

The chart that keeps nagging at me is this one – household debt to GDP:

To put this in some context – from an IMF paper by Japelli, Pagano and Maggio in October 2008 (here) – the US was at 85% and the UK at 75% back then. And because we can – a heat map of Europe’s household debt to GDP in 2008 (apologies for RSS readers – don’t know how to make the map portable – click back to the website for a peek).

Red > 70%, Orange 50% – 70%, Yellow 30% – 50%, Dark Blue 10% – 30%, Light Blue < 10% and Grey n/a

While in Asia – the emerging world has a great deal of slack in the debt department…

Now the inescapable conclusion from this is that Australia’s debt to GDP ratio is high – we are glowing bright red. Perhaps it’s sustainable – our disposable incomes will rise to compensate for the elevated debt levels – but the downside risks to the economy from this position are pretty fearsome. External shocks, such as rapidly rising global interest rates, could quickly derail the apple cart.

Still, the RBA is sanguine for the moment – pointing to rising disposable incomes: