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Australian household debt hits record high, what should you do?

The Reserve Bank of Australia (RBA) and Australian Bureau of Statistics (ABS) have released the latest Australian household finance statistics to June 2018 today.

One of the numbers that looked alarming to me was the ratio of household debt to household income has yet again reached another all-time high. At March 2018 the ratio was 189.6% and at June 2018 it rose to 190.5%.

A decade ago at June 2008 it was 162.7%, in June 1998 it was 99.5% and in June 1988 it was 63.2%. Not a good trend, right?

The obvious reason for this is that house price to income ratios have steadily risen alongside this debt ratio. The big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have been clear beneficiaries.

Affording the debt has gotten steadily easier as the interest rate has fallen all the way down to the record lows we see today.

But, rising household debt cannot be described as a good thing. The ratio is likely to keep rising as most new household buyers are taking on loans far in excess of 190.5% of their income.

What to do about it? Well, if you do find yourself in heaps of debt then the obvious thing to say would be to try to pay it down.

Interest rates are rising in the US and this is forcing banks here to implement out-of-cycle rate hikes. The US Fed expects to keep increasing rates steadily over the next couple of years. The RBA will eventually raise rates too. The interest we pay on debt is very likely to rise in the next year or two.

Foolish takeaway

We can’t control what’s going on with the economy or how much debt other people have. But we can control our own debt levels and having a few months of expenses set aside as cash in-case we ever need it.

If household debt does start becoming a problem for Australia, I'd want to make sure I held this top ASX stock for its defensive qualities.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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