Why Australia's Sky is not falling

[kum yin lau]

Hi, it'd be interesting to see how much debt SS investors contribute to those 170% GDP quoted by Sphinx.

I add 1.2M How many investors would it take to collectively owe that investor debt?

Maybe I should be alarmed but the reverse is happening. Rents have gone up, interest rates down & my cashflow has increased significantly.

Exactly what happened in 2000. Plus the equity has gone up too because when interest rates were high, the loans continued to be paid down.

I'm going to fix my loans for 3 years at the end of which my debt will be lowered by 30%

The last arrow in the quiver is a 4 letter word. Work. If all else fails, I will go back to paid employment.

Still touch wood for luck. Afraid I can't agree with Sphinx.

I'm with Chilliaa as I think his analysis is far more sensible. It's only a question of time when the stock market bounces back. If we manage our cashflow, we will be no worse off than those who don't do anything, don't buy anything or don't take any risks at all.

KY

 

[lizzie]

good thinking kyl ... should start a poll.

personally we're supplying 10x "our wages" income to the nation debt level - does that mean our contibution is 1000% of our personal gdp? - but our portfolio is worth 20x the wages income and, if we locked in at the 4.99% we'd be cashflow positive.

we're happy with our debt level.

 

[BayView]

Hi, it'd be interesting to see how much debt SS investors contribute to those 170% GDP quoted by Sphinx.

I add 1.2M How many investors would it take to collectively owe that investor debt?

Maybe I should be alarmed but the reverse is happening. Rents have gone up, interest rates down & my cashflow has increased significantly.

Exactly what happened in 2000. Plus the equity has gone up too because when interest rates were high, the loans continued to be paid down.

I'm going to fix my loans for 3 years at the end of which my debt will be lowered by 30%

The last arrow in the quiver is a 4 letter word. Work. If all else fails, I will go back to paid employment.

Still touch wood for luck. Afraid I can't agree with Sphinx.

I'm with Chilliaa as I think his analysis is far more sensible. It's only a question of time when the stock market bounces back. If we manage our cashflow, we will be no worse off than those who don't do anything, don't buy anything or don't take any risks at all.

KY

great post KYL.

We have a similar debt to you; and it is basically all investment except the block of land.

So, as far as adding to the horrible spectre of potentially destructive consumer debt to our society and economy; we contribute none.

But, we absolutely hammer the credit card every single month. We put every possible purchase on it to get the (now pretty useless) frequent flyer points and pay it all off at the end of the month. No interest.

I think more and more people are doing this, but still not enough.

 

[Shadow]

have you calculated how much public spending is needed to counteract the fall in private debt to a normal level? Currently, private debt is at 170% of GDP. And the normal level should be around 50%.

Why is 50% the 'normal' level?

Is the 'normal' population of the world 3 million? It used to be.
Is the 'normal' cost of a loaf of bread 5 pence. It used to be.
Is the 'normal' human life expectancy 30 years. It used to be.

What is considered 'normal' changes with time. Times have changed.

Credit growing faster than GDP is not necessarily a problem. GDP is income received each and every year, while credit is an expense that is only paid once. It makes more sense to either chart GDP against the interest on the debt, or to chart total debt against total assets.

GDP is not really comparable to total credit. If my income rises by $100 and my total debt rises by $110 then even at an interest rate of 10% pa, I'm still ahead by $89 (100 - (0.1 x 110)), even though my total debt has increased at a faster rate than my income. The same analogy applies to Australia's Credit vs GDP ratio.

Also, although the interest on the total credit must be paid every year, not all of this credit is owed to foreigners, so to some degree we are paying the interest to ourselves. From the perspective of the overall economy, debts are not just negative assets. They simply represent a pledge to transfer funds from one person to another at some future point in time. They are as much an asset to the lender as they are a liability to the borrower.

An important point about Australia's debt is that it's all private debt. Private individuals choose to borrow or not as they wish. It's their own personal debt, not the governments, not yours, not the average Australians. The people most able to handle this debt, are those people who took on the debt. The Australian government is free of debt.

In short, Australia's credit vs GDP ratio is not necessarily a problem.

This is what the RBA has to say about it...

http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html

Has the expansion of household credit run its course? Will it reverse?

We cannot know the answer to these questions with any certainty, but my guess is that the democratisation of finance which has underpinned this rise in household debt probably has not yet run its course.

In the past, the lack of access to credit had resulted in Australian household sector finances being very conservative. Even as recently as the 1960s, the overall gearing of the household sector (taking account of all household debt and all household assets) was only about 5 per cent – that is, households owned 95 per cent of their assets, including houses, outright. This meant that the household sector had significant untapped capacity to service debt and large unencumbered holdings of assets to use as collateral for borrowings. Financial institutions recognised this and found ways to allow households to utilise this capacity.

The increase in debt in recent years has lifted the ratio of household debt to assets to 17½ per cent (Graph 6)3. I don’t think anybody knows what the sustainable level of gearing is for the household sector in aggregate, but given that there are still large sections of the household sector with no debt, it is likely to be higher than current levels.

Cheers,

Shadow.

 

[hobo-jo]

You are wrong.
1) This crisis is caused by "private debt", not public debt. Australia's private debt is the highest in the world (private debt/GDP ratio), worse than US. That is why several studies have shown Australia will be hit much harder than US and Europe, eventually.

Have you got data to back that up?

I don't know how reliable this info is, I just found the above quoted text to be quite unbelievable so I googled it:

Source

The latest Flow of Funds data records the aggregate US Debt to GDP ratio as 381% of GDP (with the private sector’s share of that being 290%).

Australia's private debt is around 160%, almost HALF of the US ratio.

What studies are you talking about? Link?

 

[Francesco]

credit card debt (less than 50 billion) is only a small part of the 170% GDP (1.1 trillion) private debt. Most of the private debt is in the loans on highly overpriced property.

Debt is incurred also for investments even if it is non credit card debt. For example, if I borrow $100 in loans I can secure guaranteed income of $9 and pay interest of say, $7, earning a passive profit of $2. Obviously, the debt/equity ratio is huge (100/2 = 50, after the first year, 25 in the second year) in the example but the guaranteed income is attractive and secure. If this arrangement can be set for the long term, then even at a high debt equity ratio, it is a productive and secure arrangement.

My investment example is non RE but currently with the IR low many IP can be cashflow positive.

 

[DadOfSam]

The tricky thing about the IR cuts to date has been that it seems a big proportion of mortgage holders haven't cut their repayments in response, and are instead paying down their debts. Great for them and their balance sheets, and better for those households in severe housing stress of course, but terrible for the effectiveness of monetary and fiscal policy here in Australia.

Westpac estimates a total of $7.5B was paid off mortgage debt last quarter - instead of being spent by consumers (see attached picture). From the Westpac Economic Report on GDP

Most of the savings appears to have gone towards paying down housing debt. The national accounts figures and RBA credit data imply that households injected an enormous $7.5bn into their housing equity in Q3, most of which would have been via paying down principal. This is only the third net equity injection recorded since June 2001. It is easily the largest ever in dollar terms and is the biggest as a proportion of income since 1998Q3.

If Q3 is a guide and households remain as deeply concerned about reducing their debt levels in the months ahead, the implication is that there will be little or no boost from policy stimulus in Q4.

But the Q3 outcome may be a poor indication of how consumers react to the next round of policy stimulus. In particular, the boost coming through in Q4 is set to be much larger than that in Q3.

Instead of a $1.9bn increase, household disposable incomes will be lifted by well over $14bn with $5.9bn in reduced interest payments and one-off fiscal bonuses of $8.7bn.

If consumers were to save all of the Q4 boost, this would be an extraordinary result. It would imply a jump in aggregate household savings from $6.5bn to $21.2bn – a savings ratio of 11.7% which would be the highest since 1984 and easily the sharpest rise in savings since records began in 1959.

We think this is too extreme. While households will clearly remain cautious about their spending, we believe the size of the policy windfall and the targeted nature of the fiscal stimulus means at least some of it will be spent. Our current forecast of a 1.8% rise in consumer spending in Q4 assumes just $1.5bn of the policy boost is spent, with a further $1.5bn spent in 2009Q1 and $0.5bn in Q2. This still implies a further sharp rise in the household savings ratio, to an 18yr high of 7.7%, and the sharpest annual increase in household saving rates on record but not quite the extraordinary rise a 'zero pass through' assumption would result in.

Hopefully punters get out and buy this Xmas, but there's no guarantee unfortunately. If anything this $10B is more likely to bail out mortgage holders than the economy - so it's not all bad for PIs! But to suggest that IR cuts are more effective in Australia than other countries is a theory that so far isn't matching reality. It's a scary thought that all this economic stimulus might only trickle through (if you can call $3.5B over 9 months a trickle!), but this month will be the key.

 

[chilliaa]

the ability to pass on lower interest rates to consumers is very important.
In simple terms consider what is the quantitative total interest reductions to date to the average consumer:
Ball park averages (and please dont nit grit this figure, its only to make a point)
3% reduction x $300,000 home loan equals $9,000.
Now if the consumer saves it he is reducing debt, which will alow for a future increase in debt. It may also make this consumer feel happier and more secure.
If he spends it, well $9,000 flows through as consumer expenditure.
Thus the proportion you decide to save/spend will depend on your personal preferences, but you have CHOICE how to allocate that additional money.

The difference is between australia and the UK & US where reductions are not being fully passed down to consumers is that consumers in those countries dont have this choice.

 

[BayView]

The tricky thing about the IR cuts to date has been that it seems a big proportion of mortgage holders haven't cut their repayments in response, and are instead paying down their debts. Great for them and their balance sheets, and better for those households in severe housing stress of course, but terrible for the effectiveness of monetary and fiscal policy here in Australia.

How dare we do something intelligent and pay down some debt.

Get out there and spend, spend spend, and go broke - you horrible people.

Kev said it was ok.

And, spend it on CONSUMER stuff.

Even better.

 

[Piston Broke]

lol Bayview, i was thinking the same thing.
This forum often becomes a frugality contest to the point where how much water is used shaving is discussed, but then we're expect to be "bailed" out by the common folk blowing any benefit they may receive because they ran out of money to spend, and cant borrow any more.
It's also like:
Should PI's pass on interest rate drops? Like hell they say, we worked for it.
Should banks pass on interest rate drops? Of course they should, those greedy sob's!

this place is fun

 

[letiha]

lol Bayview, i was thinking the same thing.
This forum often becomes a frugality contest to the point where how much water is used shaving is discussed, but then we're expect to be "bailed" out by the common folk blowing any benefit they may receive because they ran out of money to spend, and cant borrow any more.
It's also like:
Should PI's pass on interest rate drops? Like hell they say, we worked for it.
Should banks pass on interest rate drops? Of course they should, those greedy sob's!

this place is fun

I'm happy to pass on every single interest rate drop to my tenants, the day they agree to increase their rent everytime interest rates go up.

 

[DadOfSam]

The tricky thing about the IR cuts to date has been that it seems a big proportion of mortgage holders haven't cut their repayments in response, and are instead paying down their debts. Great for them and their balance sheets, and better for those households in severe housing stress of course, but terrible for the effectiveness of monetary and fiscal policy here in Australia.

How dare we do something intelligent and pay down some debt.

Get out there and spend, spend spend, and go broke - you horrible people.

Kev said it was ok.

And, spend it on CONSUMER stuff.

Even better.

I agree, it's the smart thing to do for householders. Unfortunately it'll mean a recession for us. Is that what you're joking about? I assume you're being sarcastic in some way - are you agreeing with Westpac that interest rate cuts aren't being effective, or laughing at the OP's assertion that dropping interest rates is more effective here than in other countries? I don't think you're being very friendly to chilliaa if that's the case.

I assume you don't wan't a recession? I could be wrong. Or are you assuming that Australia being in a recession is irrelevant to PIs, or that consumer spending is irrelevant to whether Australia will be in a recession?

What was your point Bayview? Ta in advance.

 

[BoatBoy]

I agree, it's the smart thing to do for householders. Unfortunately it'll mean a recession for us. .

Why is it entirely up to the homeowners to spend the additional cash to stave off recession?

Surely there are plenty of renters and stay with parents workers/dollies that are just as capable of spending.

Dave

 

[wylie]

This forum often becomes a frugality contest to the point where how much water is used shaving is discussed.....

You SERIOUSLY think people are worried about the COST of water as in being "frugal". Mate, I want people to treat water like the precious resource that it is. When Brisbane's dams were down to 17% it was getting pretty scary.

If you believe people on here are basing their concerns about the wanton wasting of water based on MONEY, you have really missed the point.

 

[buzzlightyear]

The reality is those who have been targetted for government assistance are those who typically need to spend most of their income eg pensioners, carers, low income families. They wouldn't have much discretionary spending in anycase.

AUD 8.7billion alone is targetted for these areas. It will have some affect, however, this will be generally spend in retail (eg groceries, petrol and general living expenses). Not sure how this is going to avert the continued slowdown.

The US had a one-off $600 (?) payment quite a few months ago for memory and the government made the same point. Go out and spend. Hasn't really had much affect on their economy.

 

[DavidMc]

Currently, private debt is at 170% of GDP. And the normal level should be around 50%.

Agree with Shadow.

Who says 50% is the normal level? Why do we have to revert back to 50%?

Isn't the 'normal level' the highest we can comfortably service with the more modern lending technology we have today? (i.e. the ability to access equity in assets, the ability to chase people down who don't pay, the ability to rate and rank peoples credit risk).

 

[DavidMc]

Also, my credit card constant owes $3.5k on it. I never pay any interest though.

 

[MichaelW]

The tricky thing about the IR cuts to date has been that it seems a big proportion of mortgage holders haven't cut their repayments in response, and are instead paying down their debts. Great for them and their balance sheets, and better for those households in severe housing stress of course, but terrible for the effectiveness of monetary and fiscal policy here in Australia.

One question, and a simple one at that...

If households are just using interest rate cuts to pay down their principal instead of reducing their repayments, what does this suggest about the ability of these households to service their current debt levels?

i.e. Wouldn't you think that "stretched" households would desperately follow the banks down with interest rate cuts and beg to allow their monthly repayments to reduce?

Somehow, the picture of the stressed household P&L seems overstated.

Debt servicability appears to be pretty good at present despite record price to income ratios. Funny that isn't it. Wouldn't have anything to do with all the things I've posted before around dual income families, rental yields, equity proportions, disposable incomes etc. Funny how that old metric of house price to individual income seems not to be able to accurately represent the true servicability picture any more...

Funny how times change and metrics lag or lose relevancy.

Cheers,
Michael

PS One other thing, when looking at servicability of your IPs you need to consider that you actually have "three" income streams servicing those debts: Yours, your tennants, and the governments. i.e. You put in a bit towards the interest, your tennant puts in a bit towards the interest and the government (via NG) puts in its bit. Again, funny how old metrics of take home pay vs property prices don't quite fit that neatly.

 

[Witzl]

/ looks at mortgage default levels in Australia.

Yep... smooth sailing in Aus.
If there was a real issue with the "debt vs GDP" argument that sphinx is bellowing, then wouldnt that be reflected in the mortgage default rates?

I agree with Chillia, shadow, and all the others who have put forward reasonable arguments that make sense using CURRENT input data.

Historical analysis is only relevant if the arbitrary inputs are a constant - and in this case they most certainly are not:
- dual incomes
- use of 55-days interest free credit cards
- use of equity to secure further credit
- all the other reasons already stated.


Sorry sphinx... but your argument is outdated.

 

[lizzie]

/- use of 5-days interest free credit cards

wow - mine's only 55 days interest free ....