I've taken a look at
the speech that was the Pascoe's article, and I've got a couple of comments.
Comparing the personal debt position of Australia with its peers and saying it'll be fine doesn't reassure me when the best comparisons are the UK, US and Spain. None of these countries are doing too well right now...
To my eyes the Netherlands looks really worrying. The tax system allows for mortgage interest to be offset.
I had an estimate done for me when I first went over there, and I'd have been taxed something like 50% of my income had I not got the 30% rule. (Expat workers get 30% of their salary tax free.) So being able to offset interest payments is a nice break for the locals.
Another chart I found interesting was this one.
It looks like the owner occupier rate is falling off for the under 35s, whereas those between 45 and 65 are carrying more debt, which I suspect is down to them holding IPs.
Digging into some of the numbers, household assets have risen from 1.75 times income in the early '90s to 2.75 times now. In the same time debt has risen from about 50% to 150% of disposable income.
What's not clear in the speech is whether the asset value is net of debt or not.
If not then over the last 20 years households have retained the same level of ownership of assets (at approximately 1.25 times income), but the level of debt has increased.
If it is net then the assets held have gone from three and a half times the amount of debt to about one and two thirds times. So the ratio of debt to asset value has more than doubled.
Neither strike me as good long term trends.
Battellino is sanguine about increased debt levels because of lower interest rates. The average between '85 and '95 was 11.4%, versus 5.3% over the last decade.
I'd be a bit more concerned about this. Private debt levels have tripled over the same period, meaning that interest payments would be 140% of what they were around 1990.
I've run the numbers through the
BBC Mortgage Calculator, and a $100,000 loan at 5.3% over 25 years would be about $610 per month, and at 11.4% it's about $1020. So though interest rates have more than halved, repayments would be around 60% of those in the early '90s. Or repayments for the current debt load are about 180% of what they were back then.
So, again, not a good trend in my opinion.
The speech gives a distribution of loans versus incomes, but neglects to correlate this with income. I've found an ABS
paper from last year that allows me to do this using incomes from 2007 - 2008. (Should be close enough.)
For each quintile (1 = lowest, 5 = highest):
- Share of income: 7.6%; share of debt: 3.4%
- Share of income: 12.7%; share of debt: 6.4%
- Share of income: 17.4%; share of debt: 16.3%
- Share of income: 22.9%; share of debt: 24.7%
- Share of income: 39.4%; share of debt: 49.2%
It strikes me that the fifth quintile has a disproportionate level of debt relative to income, and could be vulnerable in a downturn. I'd like to be able to cross-reference the above with asset ownership too.
Lastly, compare Battellino's conclusions to Pascoe's. Battellino says that things look sustainable, but refrains from commenting on whether the country is over-geared, holds too much foreign debt, and the banks are too reliant on wholesale funding.
I'd say he's comfortable with risk levels, whereas Pascoe says that there aren't any. They're not exactly the same thing.
