There is a more imminent risk that Australia's mammoth household debt -- the largest among G10 countries -- will increase the risks of deleveraging and defaults in 2019.
At the start of the year, this monstrous pile of debt stood at $2.47 trillion, or 199.7 percent of disposable household income, according to the Australian Bureau of Statistics. Swiss investment bank and financial services firm UBS Group AG called this dangerous level "extremely elevated" and "one of the highest in the world." It's gotten worse since.
The Household Deleveraging Risk Indicator from U.S. investment banking giant Morgan Stanley now warns Australia "leads the world in dangerous debt." It said there is an "imminent risk" this might happen as early as 2019.
The report cited Australia as the "most exposed" to a wealth wipe-out because of the country's high debt levels in addition to falling house prices. It said Australia looks the most exposed to massive deleveraging.
The reasons for this grim assessment: high household and external leverage; a weak domestic housing market and potentially debilitating tax policy adjustments in 2019. As of today, these risks are being held in check by a strong global economy and rising public structure spending.
Morgan Stanley, however, said there remains the risk of an elevated, longer and deeper than usual balance sheet recession if these conditions change.
It said Australia and other economies with high household debt such as Sweden and Canada now face a crucial juncture as housing markets weaken. This weakness will force a reappraisal of leverage and wealth, and as global financial conditions tighten will increase the consumption drag from debt service and rising savings.
Australia's household savings rate, which is just a one percent fraction of disposable income, is another cause for grave concern. Morgan Stanley said it is most concerned about the narrow savings buffer currently carried by Australian households and the potential impact of a deleveraging phase on these households.
It noted that from the perspective of wealth effects, it forecasts a 10 percent to 15 percent real house price decline. Combined with a 20 percent debt/asset gearing levels, this reduction will "inflict a serious dent in net worth."
Also a negative for Australian families is that housing prices are expected to tumble even further in 2019 when the contents of what is expected to be a damning report by the Banking Royal Commission and the Hayne Royal Commission are made public. The Commission inquired into and reported on misconduct in the banking, superannuation and financial services industry.
The International Monetary Fund (IMF) has long warned Australia faces risks from high household debt and inflated house prices. Earlier this month, the IMF listed Australia among the countries where household leverage is a worrisome problem.
It said household leverage stands out as a key area of concern, with the ratio of household debt to GDP on an upward trajectory in a number of countries. Rising household leverage is especially worrisome in countries that have experienced increases in house prices, notably Australia, Canada, and the Nordic countries. Deleveraging this debt will slash more than $700 billion from Australian household wealth.
