From the middle of next year, Australian households could face the same credit crunch that confronted them in 1990 when official cash rates hit 17 per cent, analysts claim.
Although Australia's cash rate is now 5.25 per cent - well below the historic highs of more than a decade ago - increasing household debt levels have closed the gap, according to accounting firm Grant Thornton.
Over the past decade, the ratio of household debt to household income has soared from a level that was low by international standards at 56 per cent to about 134 per cent of household disposable income.
The counterview is that household wealth, including cash, shares, bonds and non-financial assets such as housing, has continued to grow by the same rate. The result: the level of household debt to the level of assets has remained relatively static.
But Grant Thornton director Paul Ashworth said the explosion in household debt had reduced the comfort margin, regardless of the rise in good fortune.
The problem is that most of the wealth has been due to surging property prices and cheaper finance. Now home buyers and investors face the prospect of a scissor effect: interest rates moving in one direction and property prices going the other way.
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"In balance sheet terms, it doesn't look so bad but the problem is that indebtedness still needs to be funded," Mr Ashworth said.
"Indebtedness is okay whilst you have actually got some increase in that asset value, whilst you actually have a market place in which you can deal on those assets and whilst you also have a financial system that's prepared to release some of that equity.
"Now, with asset prices not increasing, financial institutions are very much less inclined to want to release any more of that equity and, secondly, it's the pressure of whether we can hold this property. Even though it's only yielding 2 per cent in net terms, cost of funds is now 7 per cent."
Worse still, he warned that the debt service burden was set to reach an all-time high by mid-2004, even without another Reserve Bank of Australia rate hike. Economists believe a 0.25 per cent February rate rise is a sure bet.
Mr Ashworth said the most dramatic measure of the financial imbalance had been in what's termed as the "residential ATM" - home owners borrowing against their property and pulling equity from their homes.
Home equity withdrawal is now running at more than 7 per cent of disposable income. Investment in second properties or property renovations was not included in the home equity withdrawal figures.
At the same time, Australians' average savings rates have fallen behind those of Americans.
"One of our key concerns is that income growth is moving at 4-5 per cent and household debt has been increasing at 23 per cent, so you can see a significant disconnect," Mr Ashworth said.
"What makes this cycle different from the '90s is it is going to be more difficult to recover because the thing that will not change is the gross level of indebtedness. The ability of households to pick up spending activity and investment activity over the course of the next cycle will be far diminished compared to the 1990s."
But National Australia Bank chief economist Alan Oster said that the wealth effect was the counterweight to concerns about household debt.
"The sort of argument you're having is technical . . . What really matters is whether people can sustain that income level."
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