With volatile house prices having troubled Australia already over the last few years, a report revealing that the country has the riskiest levels of household debt worldwide will hardly be music to the Treasury’s ears.

The report is called the Household Deleveraging Risk Indicator, delivered by US investment bankers Morgan Stanley. It suggests that the nation ‘leads the world in dangerous debt’, with levels way above the rest of the G10.

This means that the Australian people could suffer from a large reduction to their wealth because the risk of debt deleveraging remains high. The cut could end up at a whopping $700bn, and the report indicates that this could happen as early as 2019 if action is not taken to prevent it.

Analysts Daniel Blake and Chris Read said that Australia is problematic, calling it the ‘most exposed’ out of the countries analyzed. The report assessed levels of household debt in all G10 countries.

Citing ‘high household and external leverage, weak domestic housing conditions and potential further macroprudential and structural/tax policy adjustments,’ these analysts believe that Australia faces a problem that other countries are better protected against. 

While ‘strength in the global economy and support from public infrastructure spend’ can alleviate some of these issues, there is still ‘the risk of a longer/deeper than usual balance sheet recession’ if actions are not taken to reduce high household debt.

The Morgan Stanley strategists said that ‘these economies now face a crucial juncture as housing markets weaken, forcing a reappraisal of leverage and wealth.’ They warned of what happens when ‘global financial conditions tighten, increasing the consumption drag from debt service and rising savings.’

The lack of a strong housing market in some areas is likely to mean that some locations will fare worse than others. Areas in regional cities near state capitals are doing quite well, but otherwise, there are trends of clear drops in house prices. The government has welcomed this happening slowly, and with stability, but the drop will need to be well-measured.

One particular issue is the lack of general household savings for the average Australian, which works out to around 1% of the typical disposable income.  

This means that companies such as Morgan Stanley are worried, saying that ‘the potential impact of a deleveraging phase for Australian households is the narrow savings buffer that is currently carried.’

It added that considering ‘wealth effects, our forecast 10-to-15% real house price decline would combine with 20% debt/asset gearing levels to inflict a serious dent in net worth.’

This would equate to a gigantic financial black hole for many citizens, and if extrapolated nationwide, it would be worth $700bn of dropping wealth.

Interestingly, the picture remains split in the G10, with Sweden, Canada and Norway also struggling while countries such as the US and the UK have managed to trim their average household debt.

The report described this problem as hitting Australia more so than any other countries because of the ‘floating mortgage rate’ set by banks, which means that the public are more susceptible, even if their debt rises in line with other nations.

This means that Australia, along with New Zealand, is ‘the most structurally vulnerable, driven by sensitive debt servicing and large external exposure,’ according to the report.

With the household debt ratio against income having doubled in two decades, it seems unlikely that this trend will be easily reversed.