What implications does having the highest household debt to disposable income ratio have on Australia?
Stock market Tends to follow the DJIA and FTSE, so unlikely to see an Australia-only crash, especially while resources are doing so well. If China's growth slows before other ailing sectors improve, a downturn becomes more likely and the potential severity of the downturn increases. Economy A huge question to which I would refer you to Steve Keen: http://www.debtdeflation.com/blogs/ See A Fork in the Road. Housing Market It's a bubble, stupid! Seriously, it's as though the Aussies waited for the US to get done and then simply borrowed the copy book. There are a multitude of articles out there about likely outcomes from where the housing market is and where it's going. See this for a sample of what's out there: http://blogs.forbes.com/greatspeculations/2010/07/26/aussie-housing-bubble-gets-popped-with-chinese-credit-crash/ Note: All three of the areas you raise - economy, stock mkt, housing - are so intertwined that it's tricky separating them out. A lot of reading on Steve Keen's site can help. "I'd like to see a credible source for ""the highest"", but it's certainly fairly high. Household debt could be broadly categorized as debt for housing and debt for consumption. Housing prices seem very high compared to equivalent rental income.  This is generating a great deal of debt.  Keynes(?) said that ""if something cannot go on forever, it will stop.""  Just when it will stop, and whether it will stop suddenly or gradually is a matter of great interest.  Obviously there are huge vested interests, including the large fraction of the population who already own property and do not wish to see it fall.  Nobody really knows; my guess would be on a very-long-term plateau in nominal prices and decline in real prices. The Australian stock market is unlike the US: since it's a small country, a lot of the big companies are export-driven, either by directly exporting physical goods (miners, agriculture) or by FDI (property trusts, banks).  So a local recession will hurt the stock market, but not across the board.  A decline in the value of the Australian dollar would be very good news for some of these companies. Debt for consumption I think is the smaller fraction.  Arguably it's driven by a wealth effect of Australia having had a reasonably good crisis with low unemployment and increasing international purchasing power.  If this tops out, you'd expect to see reduced earnings for consumer discretionary companies." It is basically the same situation what US was when the crash happened. People took on debt without the means to pay, even with awful credit records. But the problem isn't the debt people take on themselves, but with the limited disposable income they have how efficiently can their debts be serviced. And how do banks who lend out money can recover their money. When banks lend money to all and sundry, they have to take care of defaults and that is when financial wizardry comes into play. In US people have the option to default on their debt and refinance it, so banks assumed default and tried to hedge their risks. If this is an option in Australia, be ready for a crash else not to worry about much. If banks continue lending expect higher inflation rates, higher interest rates and maybe a downgrade of bonds issued by the Australian government. Higher import costs and a boom in exports because of devalued Australian dollar.
We are the richest nation in the history of the world. We produce and consume more now than at any point in history.   Credit card debt is nowhere near historical levels. Delinquency rates on credit card loans is near the lowest it has ever been.  https://fred.stlouisfed.org/series/DRCCLACBS   It may seem wild and not make a lot of sense that data does not fit your worldview, but let yourself be open to information that conflicts with your own.   otherwise you are just held hostage by your own misconceptions.   You are going to wait a lifetime for that riot pal and you may learn to capitalize proper nouns while you are at it. "As was stated, households earning over $250k/yr don't all get their income one way. Below that threshold, even in the six figure range, most households are in one of two categories; salary/wage/commission workers, and those living off of nest eggs/entitlements (retired, disabled, welfare). Above $250k, though, are a lot of disparate types of incomes: Now, you specifically mentioned wage earners above $250k. Wage earners typically have the same ""tax havens"" that most of us do; the difference is usually that they are better able to make use of them: In other words, there are many ways for a high-end wage earner to live the good life and write a lot of it off." First of all debt is a technology that allows borrower to bring forward their spending; it's a financial time machine. From borrowers point of view debt is good when it increases overall economic utility.  A young person wants to bring up a family but cannot afford the house. Had they waited for 30 years they would have reached the level of income and savings to buy the house for cash. By the time it might be too late to raise a family, sure they'd enjoy the house for the last 20 years of their life. But they would loose 30 years of utility - they could have enjoyed the house for 50 years! So, for a reasonable fee, they can bring the spending forward.  Another young person might want to enjoy a life of luxury, using the magical debt time machine and bringing forward their future earnings. They might spend 10 years worth of future earnings on entertainment within a year and have a blast. Due to the law of diminishing marginal utility - all that utility is pretty much wasted, but they'll still will need to make sacrifices in the future. The trick is to roughly match the period of debt repayment to the economic life of the purchase. Buying a house means paying over 30 years for an asset that has an economic life of 80 years+, given that the interest fee is reasonable and the house won't loose it's value overnight that's a good debt. Buying a used car with a remaining life of 5 years and financing its with a seven years loan - is not a good idea. Buying a luxurious holiday that lasts a fortnight with 2 years of repayments, i.e. financing non-essential short term need with medium term debt is insane. The other question is could the required utility be achieved through a substitute at a lower cost without having to bring the spending forward or paying the associated fee. "I'm not intimately familiar with the situation in Australia, but in the US the powers that be have adopted an interventionist philosophy. The Federal Reserve (Central Bank) is ""buying back"" US Gov't debt to keep rates low, and the government is keeping mortgage rates low buy buying mortgages with the proceeds of the cheap bond sales. While this isn't directly related to Australia, it is relevant because the largest capital markets are in the US and influence the markets in Australia. In the US, the CPI is a survey of all urban consumers. If you're a younger, middle class consumer with income growth ahead of you, your costs are going to shift more rapidly than an elderly or poor person who already owns or is in subsidized housing, and doesn't spend as much on transportation. For example, my parents are in their early 60's and are living in the house that I grew up in, which they own free and clear. There are alot of people like them, and they aren't affected by the swing in housing prices that we've seen in the last decade." The higher the debt, the higher inflation needs to be to wash the debt away.  This is why the debt and US equities move upward hand in hand. The same goes for US housing. Just as homeowners borrow money through mortgages so that house prices rise, the banks borrow the money for mortgages through the central banks. Thus, the cycle circulates. The more debt, the higher the prices!  Everybody makes money from debt. That is why the US has the highest external debt on the globe, yet they are considered one of the wealthiest countries in the world. It could be a a way to preserve the value of your money, but depends upon various factors. If a country defaults, and it leads to hyper-inflation, by definition that means that money loses its purchasing power.  In even simpler terms, it cannot buy as much tomorrow as I could today. Therefore people can be incented to either hoard physical goods, or other non-perishable items. Real-estate may well be such an item.  If you are resident in the country, you have to live somewhere.  It is possible that a landlord might try to raise rent beyond what your job is willing to pay.  Of course, in a house, you might have a similar situation with utilities like electricity... Assuming some kind of re-stabilization of the economy and currency, even with several more zeros on the end, it is conceivable that the house would subsequently sell for an appropriately inflation adjusted amount, as other in-demand physical goods may. Lots of variables. Good Luck. "**[More Details](http://researchnews.osu.edu/archive/heavydebt.htm) . . .**  * http://researchnews.osu.edu/archive/heavydebt.htm  **Here Are The Studies . . .**  * ""[Were Consumer Mistakes Related to Changes in Financial Obligations Burdens?](http://www.consumerinterests.org/pdffiles/2012-conference/2012-55%20Were%20Consumer%20Mistakes%20Related%20to%20Changes%20in%20Financial%20Obligations%20Burdens.pdf)"" by Sherman D. Hanna, Yoonkyung Yuh, and Swarn Chatterjee: http://www.consumerinterests.org/pdffiles/2012-conference/2012-55%20Were%20Consumer%20Mistakes%20Related%20to%20Changes%20in%20Financial%20Obligations%20Burdens.pdf      Via: http://www.consumerinterests.org/2012-Conference-papers.html  * ""[Increasing financial obligations of US households: Who is affected?](http://onlinelibrary.wiley.com/doi/10.1111/j.1470-6431.2012.01125.x/abstract)"" by Sherman D. Hanna, Yoonkyung Yuh, and Swarn Chatterjee: http://onlinelibrary.wiley.com/doi/10.1111/j.1470-6431.2012.01125.x/abstract" Could it be done? Yes, it could, subject to local law. A variant of such an approach has been suggested for those countries experiencing collapse of demand. One might consider whether whether it applied to secured loans (such as mortgages), unsecured loans, or both; whether it would be capped at a certain absolute (say £100k) or proportional (first 50%) of each mortgage; whether it would cover first homes only, or all homes; and so on.  These details would radically change the feasibility and consequences of any such intervention. See the related question: https://economics.stackexchange.com/q/146/104 Such a policy of debt cancellation would have several consequences beyond initial stimulation of demand, that would need additional policies to deal with them. Inflation The resultant surge in demand would, in the absence of any other intervention, result in a massive surge in inflation. There are some interesting questions about whether this burst of inflation would be a one-off, or not. One could make an argument that as housing has become much more affordable (at least for home-owners), it would increase the downward pressure on wages, which would be in itself counter-inflationary in the medium-long term. Nevertheless, it would be injecting much more money into the economy than has been seen in QE to date, so the risks would be of extraordinarily high inflation, which might or might not get entrenched. In order to manage the short-term risk, and long-term inflation expectations, it might be necessary to incorporate a lot of tightening, either fiscal (higher taxes and/or lower public spending), or monetary: (higher interest rates, unwinding QE, new requirements for higher core capital for banks) Moral hazard There are risks of moral hazard for individuals: however, as a society, we were prepared to accept the moral hazard for financial institutions and their staff, so that may or may not be an issue: it is likely to be a question of long-term expectations. If the expectation is that this is at most a once-in-a-lifetime occurrence, then the consequential risk from moral hazard ought to be lower. Excess profits to lenders Lenders will typically work on the basis of a certain proportion of defaults, so paying off all loans effectively gives them an artificial boost to their profits. Worsening balance of payments There is to a degree a prisoners' dilemma facing nations here. Pressing the reset-button on personal debt across many of the countries experiencing demand-collapse would benefit all of them. However, if just one such country were to do it alone, they alone would increase domestic demand, resulting in a large increase in imports, but no significant increase in exports. Excellent summary. I'm going to steal the analogy as it is related to how I discuss the problems of austerity to people convinced it is fiscally conservative and the right thing to do when in a poor income generating situation. (I usually explain the difference as going into debt to fund better education or skills in well-researched high-demand areas, and thereby improve your earning potential, versus cutting spending until you are living in a box eating cat food thereby making it harder to get back on your feet.) One super-profligate man generates several orders of magnitude less economic activity than if 100,000 families had, say $100,000 each; less than he managed to spend.  100,000 families with that much more money would all be able to eat at restaurants, buy clothes (I don't care how big his, his wives, and his 18 kids closets are; we're talking something like a thousand orders of magnitude here) buy cars, and just generally create a thousand orders of extra economic activity here; their economic activity of buying  would give further jobs to the sellers of all this stuff; which would in turn be able to buy stuff, and an economy recovers.    *edit spelling, grammar Correct me if I am wrong (and I know you will), but in an economy where most consumers have more debt than savings, I fail to see how moderate inflation is a bad thing. Higher wages negate higher prices, and lower debt burdens free consumer demand.   Why are there always people in freak out mode if it looks like inflation may occur even slightly? When over the long term housing costs in a area rise faster than wages rise, the demographic of who lives in the area changes. The size and income parameters change. A region that was full of young singles is now populated with couples with adult children, that means that the businesses and amenities have to change. At a national level it isn't sustainable unless other items change. The portion of monthly income that can be safely allocated to housing would have to change. One adjustment could be the the lengthening of home loan periods, thus dropping the monthly payment.  This has been seen with car loans, over the last few decades the length of loans has increased. In interesting related event could be the change in deduction of mortgage interest and property tax. If this was to change abruptly, there could be an abrupt change the estimated value of housing, because the calculus of affordability would change. Note: I am in the UK. I don't know specifically about australia but I expect the general principles will be much the same everywhere. What banks want is to be reasonablly confident that you have a steady income stream that will continue to pay the mortgate until it completes.  In general employed are fairly easy to assess. Most employed people will have a steady basic pay that increases through their career. Payslips will usually seperate-out basic pay, overtime and bonuses. There is little opertunity to cook the books. The self-employed are harder to assess. Income can be bursty and there are far more opertunities for cooking the books to make it look like you are earning more than you really are. So banks are likely to be far more careful about lending to the self-employed, they will likely want to see multiple years of buisness records so that any bursts, whether natural due to the ebbs and flows of buisness or deliberatly created to cook the books average out and they can see the overall pattern. A large deposit will help because it reduces the risk to the bank in the event of a default. Similarly not being anywhere near your limit of affordability will help. The debt doesn't have to and never should be paid off.  The fed could print $20T tomorrow and swap all outstanding US govt debt for cash and it would be net neutral in terms of financial assets outstanding.    The result would be a massive removal of income paying assets, and near total loss of control and influence over interest rates however. "A quick online search for ""disadvantages of defence housing australia investment properties"" turns up a several articles that list a few possible disadvantages. I can't vouch for these personally because I'm not familiar with the Australian rental market, but they may all be things to keep in mind. I quote verbatim where indicated."