Peak Debt

[Nullagine]

I agree completely. We need also to consider that although "the rich get richer while the poor get poorer", there is an ever increasing number of people who have the means to buy the property they want. Hence the ever increasing demand for quality, inner city suburbs. The population is growing, and I think Australians, in general, are probably wealthier than they have ever been. I can't imagine living like my parents had to - but good on them for doing what they had to do.

I also wonder what effect the Baby Boomers supporting their adult children is having on the market. Once upon a time you rented while you saved, and eventually got you deposit to a point where you could afford a small house. With shared equity loans, gifts and handouts from Baby Boomers to kids, perhaps this is distorting the market also.

My firm opinion is that regardless of how high prices become, there will always be those who can afford them, and those who will find ways to borrow for them. My plan is to have already bought the assets that these peoples' hearts desire (but now, while they're still easily affordable).

The tram then car both made sub-urb-s and co-urban-ization viable.

Telecomunications has made non-ubr-an, non-agricultural living viable.

It remains to be see if a significant portion of people take the opportunity to live non-urb-an lives.

Perhaps sufficient choosing a lower non-urb-an debt to income ratio will significantly limit future increases in the urb-an debt to income ratio.

 

[Nullagine]

How did you manage to accumulate your wealth without going into debt - your own business?

Living way below my means and ignoring the siren songs of marketeers mostly.

 

[Nullagine]

An earlier use of the phrase "Peak Debt"

Peak Debt!

 

[Mofra]

Quote from the article:

Steve Keen, associate professor at the school of economics and finance at the University of Western Sydney, agreed, saying household debt was roughly 25 per cent of disposable income in 1990, and that proportion had risen to 150 per cent. "We can't keep on doing that forever," he said.

Just a question (which is obvious if you think about it) - how do they define income & debt?
For example, gross income, net income? Large cashflows are through either companies in SMEs... do they assume all income is counted via accrual basis or not?

I only ask as some reports indicate investment debt has exploded on a level consumer debt has yet to reach... whilst someone might be able to take our a regulated resi loan of $300k, that same person could service a higher level of resi investment debt, and then gear heavily into equities & managed funds to overall debt levels that are 10-20 times their PAYE income. The ongoing returns of dividends, rental, capital gains realised through re-allocation of assets etc. would probably not be counted. What of financial plans that include this income? What of dividend stripping strategies? What of instalment warrants?

Like most financial analysis, sweeping statements should really be qualified with at least stating some assumptions taken for the purposes of modelling.

 

[Nullagine]

how do they define income & debt?

Disposable income is defined here:
http://www.rba.gov.au/statistics/bulletin/G12HIST.XLS column T

Disposable_Income (column T) = Total_Household_Income (column Q) - Income_Tax_Payable (column R) - Other_Outlays (column S)

 

[geoffw]

Disposable income is defined here:
http://www.rba.gov.au/statistics/bulletin/G12HIST.XLS

Nope.

Disposable income is anything my wife can get her hands on

 

[Nullagine]

Disposable income is anything my wife can get her hands on

That goes under Other_Outlays (column S).

 

[geoffw]

That goes under Other_Outlays (column S).

In that case, it makes my disposable income negative

 

[Nullagine]

I only ask as some reports indicate investment debt has exploded on a level consumer debt has yet to reach... whilst someone might be able to take our a regulated resi loan of $300k, that same person could service a higher level of resi investment debt, and then gear heavily into equities & managed funds to overall debt levels that are 10-20 times their PAYE income. The ongoing returns of dividends, rental, capital gains realised through re-allocation of assets etc. would probably not be counted. What of financial plans that include this income? What of dividend stripping strategies? What of instalment warrants?

Good points - care to expand on them?

Many fund portfolios are internally leveraged. So extreme leverage is not only possible but can be expected to occur. Apart from borrowed money, futures and options being another example. The complexity of that seems to have every one stonkered.

I stuck to the housing debt to household income because it is, in principal, much simpler and the data appears to be relatively free from noise and the outcomes likely to be less chaotic.

 

[alexlee]

Surely given fractional reserve banking there is no practical limit to lending and hence borrowing. i.e. in a pure banking system there is no theoretical limit on how much money can be lent and borrowed.

The only limits are those imposed by the human participants. i.e. willingness to take risk by both lenders and borrowers, and interest rates set by the central banks.

As mofra said the straight debt to income ratio does not take into account rent, dividends and other income generating strategies. Having said that, if high dividends, for example, are based on high corporate profits which is in turn based on high consumption, when consumption for whatever reason falls (usually because of sentiment) then everything else follows.
Alex

 

[Nullagine]

Surely given fractional reserve banking there is no practical limit to lending and hence borrowing. i.e. in a pure banking system there is no theoretical limit on how much money can be lent and borrowed.

The only limits are those imposed by the human participants. i.e. willingness to take risk by both lenders and borrowers, and interest rates set by the central banks.

As mofra said the straight debt to income ratio does not take into account rent, dividends and other income generating strategies. Having said that, if high dividends, for example, are based on high corporate profits which is in turn based on high consumption, when consumption for whatever reason falls (usually because of sentiment) then everything else follows.
Alex

I think there is much unneccessarily complicimicated nonsense talked about fractional reserve banking - mostly confusion about deposits and other loans to banks and the banks reserve deposits with their central bank. There are no reserve deposits in Aus because the Commonwealth deposits its surplus with the banks.

As far as I know, what is reported as Total_Household_Income in the RBA's figures is taken from tax returns - and would, therefore I would have thought, included rent, dividends and all other taxable income.

Incorporation does shift some of this debt and income out of the household accounts, but I would have thought it still relatively insignificant?

 

[alexlee]

As far as I know, what is reported as Total_Household_Income in the RBA's figures is taken from tax returns - and would, therefore I would have thought, included rent, dividends and all other taxable income.

Incorporation does shift some of this debt and income out of the household accounts, but I would have thought it still relatively insignificant?

If you assume 'ordinary' people don't use structures to hold their investments, which is probably true.

I wonder, then, does the Total Household Income figures include negative gearing? I mean, if you looked at my tax return for the last couple of years, my income to debt ratio would be negative, because I'm in a net loss postion. Going forward, my taxable income will be reduced by depreciation and for many people it might be reduced by salary sacrificing, etc.
Alex

 

[Nullagine]

If you assume 'ordinary' people don't use structures to hold their investments, which is probably true.

I wonder, then, does the Total Household Income figures include negative gearing? I mean, if you looked at my tax return for the last couple of years, my income to debt ratio would be negative, because I'm in a net loss postion. Going forward, my taxable income will be reduced by depreciation and for many people it might be reduced by salary sacrificing, etc.
Alex

My personal income consists of a little interest and some dividends from my company, my largest personal expense is a self-employed contribution to super. I expect to recieve a tax refund of $35,000 on a taxable income of $24,999. So negative tax on a positive income. No debt.

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In the RBAs table G12, Other_Outlays have increased over the years:
30/09/1959 4.40%
31/03/2007 12.51%

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The notes to the RBAs statistical tables, Other_Outlays includes interest on dwellings:

http://www.rba.gov.au/Statistics/Bulletin/NotesToTables.rtf

G.12 Gross Domestic Product – Income Components

The data for this table are from ABS Cat No 5206.0.

‘Gross operating surplus - other’ is the gross operating surplus of public non-financial enterprises and the gross operating surplus from dwellings owned by persons.

‘Gross mixed income’ is the income from production of unincorporated enterprises.

‘Other receipts’ by households includes gross operating surplus from dwellings owned by persons, property income, non-life insurance claims, current transfers to non-profit institutions and other current transfers (previously described as unrequited transfers).

‘Other outlays’ by households includes interest on dwellings, consumer debt interest, property income payable by unincorporated enterprises, social contributions for workers’ compensation, non-life insurance premiums, other current taxes on income and other current transfers.

‘Saving’ is net saving and excludes depreciation.

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Am I right to think that the vast majority of people would keep their Principal Place Of Residence in their own name?

 

[Nullagine]

New word: "debt is starting to look decidedly démodé"

Blair's legacy is a nation engulfed by debt

By Jeff Randall
Last Updated: 12:01am BST 06/07/2007

"Watching many British consumers en route to a debt crisis has been like observing drivers of cars with faulty brakes, heading confidently towards the edge of a cliff. When alerted to looming disaster, these debtors and motorists kept giving the same reply: "Relax, everything's in control." Then, whooosh!"

http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2007/07/06/do0601.xml

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Re your silence: am I boring you, have I stunned - or what?

 

[Mofra]

Disposable income is defined here:
http://www.rba.gov.au/statistics/bulletin/G12HIST.XLS column T

Disposable_Income (column T) = Total_Household_Income (column Q) - Income_Tax_Payable (column R) - Other_Outlays (column S)

Thanks Nullagine,

Looks like the income calculations are more thorough than I had previously supposed; so much income is hidden through a vast array of structured products this is about as good an attempt at statistical income research as privacy & tax laws would allow.

 

[Mofra]

Many fund portfolios are internally leveraged. So extreme leverage is not only possible but can be expected to occur. Apart from borrowed money, futures and options being another example. The complexity of that seems to have every one stonkered.

One fundie told me a while back that most ASX listed companies are so heavily geared against what amounts to little more than "goodwill" that most people would be too scared to gear into them if they knew the real/physical debt to asset ratio.

Derivatives are a difficult mistress, as by their nature holding them long or short sometimes implies obligations which can only be calculated on a net distribution basis. Many investment products are the same, "losses" protected by capital guarantees which are often little more the derivative hedging. The consumer pays investment companies a higher interest rate, therefore a higher expense (tax deductable of course) whilst the comapny offering the product passes this income on to their risk/treasury departments to hedge, as a cost of doing business. A net loss in cash is recorded for tax purposes over the lifespan of the whole product yet debt increases for the purposes of recording.

I'd be far more interested in figures that show debt vs income ratios seperated for "good" (ie deductable) vs "bad" (non-deductable) debt. If more Australians are gearing to create wealth and have appropriate risk measures in play, the cause for alarm is much less than if we are borrowing for personal, depreciating items with a short life cycle (holidays are the worst I can think of, and believe me many people do).

 

[Nullagine]

I'd be far more interested in figures that show debt vs income ratios seperated for "good" (ie deductable) vs "bad" (non-deductable) debt. If more Australians are gearing to create wealth and have appropriate risk measures in play, the cause for alarm is much less than if we are borrowing for personal, depreciating items with a short life cycle (holidays are the worst I can think of, and believe me many people do).

You might refer to RBA Table D02 (as per first post this thread):
Credit, of which:>Other personal>(incl securitisations)>nsa
http://www.rba.gov.au/Statistics/Bulletin/D02hist.xls Column N

The notes state:
‘Other personal (incl securitisations)’ includes personal loans outstanding on the balance sheets of AFIs, and securitised personal loans.
http://www.rba.gov.au/Statistics/Bulletin/NotesToTables.rtf#D

2007/April $G 138.2 against $G 849.4 for housing.

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I find defining good and bad debt very difficult. Perhaps we can agree on profitable debt being gooder. I think equity is goodest.

 

[Nullagine]

Something should be said about the ratio of debt to assets:
The Composition and Distribution of Household Assets and Liabilities: Evidence from the 2002 HILDA Survey1

The reason for focusing on debt is that those having it will respond most strongly to interest rate increases and those wanting it to credit restrictions.

 

[Nullagine]

Figure 43
Japan was the last major economy to experience a debt deflation. Though I do not think the debt data here is comparable to that shown for the USA and Australia (which is sourced from their respective Central Banks), the role of debt in bringing the economy to a standstill is obvious from this chart. Equally obvious is how economically debilitating the process of reducing debt to income levels was--and also how necessary it was to be able to restore growth.

Steve Keen's DebtWatch July 2007 pg 28-29

Spending is easy - while it lasts, saving is harder - but lasts.

 

[Nullagine]

Couldn't swallow another cent:

Australians at debt capacity: Commonwealth Bank

Well, alright, maybe just a wee waffier.