The Brisbane thread was getting way off topic so I've cut and pasted it here if anybody wants to continue the debt discussion .... (maybe not!)
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Hi Kenneth - To your previous post I think governments have behaved badly (infrustructure, land release) but I don't think this is a long term or sustainable underpinning of house prices. Eventually they will crack under the pressure - I can see some movement now - and improve their game. This will be especially so if debt is hard to get, or the high prices flow into rents. In short, government policy is an artificial shortage - it can be reversed almost as quickly as it is created - so I wouldn't hang my highly leveraged hat on the government maintaining their recent poor performance.
Household debt can not grow faster than household incomes forever. The theoretical maximum limit is when the household interest payments equals the household income. This is only theoretical as there would be no money left for anything else! This is where the rules of thumb that are often out there don't make any sense. If property doubles every 7 years for example you would very quickly run out of buyers - interest payments would be more than their income. Even if the claim was not doubling every 7 years but just that property value growth will always exceed income growth - then eventually you will hit a point where interest payments consume all of your income. It just can't happen.
What is the limit? I think its higher for higher incomes as they have more discretionary income to cut back on. So for a low income person I think the 30% of income on debt payments where beyond this they start to fall apart financially. For a high income it could be as high as 50% and they could survive.
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Hi Kenneth - To your previous post I think governments have behaved badly (infrustructure, land release) but I don't think this is a long term or sustainable underpinning of house prices. Eventually they will crack under the pressure - I can see some movement now - and improve their game. This will be especially so if debt is hard to get, or the high prices flow into rents. In short, government policy is an artificial shortage - it can be reversed almost as quickly as it is created - so I wouldn't hang my highly leveraged hat on the government maintaining their recent poor performance.
Household debt can not grow faster than household incomes forever. The theoretical maximum limit is when the household interest payments equals the household income. This is only theoretical as there would be no money left for anything else! This is where the rules of thumb that are often out there don't make any sense. If property doubles every 7 years for example you would very quickly run out of buyers - interest payments would be more than their income. Even if the claim was not doubling every 7 years but just that property value growth will always exceed income growth - then eventually you will hit a point where interest payments consume all of your income. It just can't happen.
What is the limit? I think its higher for higher incomes as they have more discretionary income to cut back on. So for a low income person I think the 30% of income on debt payments where beyond this they start to fall apart financially. For a high income it could be as high as 50% and they could survive.
