There are growing warning signs on Australian household debt – and credit risk is even worse in China


Research from the Bank for International Settlements (BIS) suggests investors should be aware of warning signs in Australia’s credit markets.

The BIS monitors a number of key data variables which can signal signs of financial stress, as part of efforts to prevent the next global financial crisis.

Their risk assessment is based on the four parameters:

Credit-to-GDP, debt/service ratios (DSRs) — for both the broader economy and the housing sector — and cross border claims to GDP (defined as the amount of debt owed to foreign countries, as a percentage of GDP).

The table below provides a summary of the latest measures, with the reading for Australia flashing amber in three of the four categories:


The research forms part of renewed efforts by the BIS to monitor the build-up of risk in the financial system, after policy makers missed key warning signs ahead of the 2008 global financial crisis.

The BIS is an international financial institution, jointly-owned by around 60 central banks.

In terms of providing a useful indicator about signs of financial distress, “household sector DSRs perform especially well”, the BIS said.

And by that measure, it’s little surprise that Australia falls on the riskier end of the spectrum — our household debt to disposable income ratio is among the highest in the world.

The BIS added that its analysis should be used to develop a more informed view about markets, but investors should treat its powers of prediction with a degree of caution.

“As always, they have been calibrated based on past experience, and cannot take account of broader institutional and economic changes that have taken place since previous crises,” the BIS said.

“The much more active use of macroprudential measures should have strengthened the resilience of the financial system to a financial bust, even if it may not have prevented the build-up of the usual signs of vulnerabilities.”

Macro-pru introduced by APRA last year had a noticeable cooling effect on Australia’s major housing markets in the latter half of last year.

And while APRA chief Wayne Byres has indicated that previous 2014 measures may soon be wound back, multiple analysts have also speculated that another round of macro-pru may be on the way in Australia.

At least the key warning signs for Australia are only flashing amber — for now. A further glance at the model shows risk indicators around the buildup of debt in China’s economy are flashing a more extreme red.

Analysts are split on whether China’s consistent annual target of 6-7% GDP growth — which is dependent on a steady buildup of debt — means the country is headed towards an economic hard landing.

Despite efforts by Chinese regulators to crack down on risky lending, recent reports suggest that China’s total debt – across households, companies and the government — will climb to almost 300% of GDP by 2022, up from 242% in 2016.