Australia's household debt rings alarm bells

SYDNEY - Australians are racking up extreme levels of debt to buy homes that are among the world's most expensive, a ticking time bomb that could wreck the economy if it is hit by a sudden shock, experts warn.

While the country is one of the best-performing developed global economies, soaring property prices have also made it a world-beater in household debt.

The nation has a household debt-to-GDP ratio of 123 percent, largely housing debt - second only to Switzerland, according to the Bank of International Settlements.

The levels exceed those in the United States, Spain and Ireland before their property market crashes, global ratings agency Moody's said in a report.

"Australians have borrowed up a storm, and housing prices in this nation are now dangerously dumb," prominent Australian economist Chris Richardson said this month.

"Compared with the global financial crisis, our vulnerabilities are higher, our defenses are weaker."

Such dire warnings contrast with Australia's recent economic experience, with the country on course for a record 26 years without a recession.

It fared well during the 2008 financial crisis, aided by its largest trading partner China's hunger for commodities.

But interest rates have been slashed to a record-low 1.50 percent to boost growth as Australia shifts from a dependence on mining-driven expansion, heating up the housing market.

Modeling by National Australia Bank found difficulties could kick in if the jobless rate, currently at 5.9 percent, rises to 8.5 percent, chief economist Alan Oster said.

"As a bank, what we do is we look at unemployment by postal code," Oster said.

"And what we find is there is around 50 postal codes where we personally don't want to lend much."

Analysts said a financial crisis worsened by severe household debt would take on a different flavor in Australia.

In the US during the 2008 crisis, homeowners walked away from mortgages when situations turned sour.

But Down Under locals go to great lengths to avoid defaulting on loans.

"Australians will take their kids out of private school, they'll sell their car, they'll not go on holidays ... they'll do whatever they feasibly can to avoid defaulting on their mortgage," said economist Saul Eslake.

"The risk is that if interest rates go up, people will be forced to spend more servicing their mortgages, and thus have less to spend on other things. It's a risk to economic growth, not a risk to financial stability."