Will resi really continue to double every 10 years?
- Thread starter Land
- Start date
The data from this link is quite revealing.
From 1993 until 2008, foreign debt from financial institutions (mostly banks financing residential mortgages) have grown from 75 billions to 793 billions. More than 10 times in 15 years!
That is huge, even though the economy doubled in size during this time. Total foreign debt grew by 5 times during that period.The key question is where the limit is though. As it depends on foreign lenders confidence, nobody really knows...
Cheers,
Somehow, as we dig more stuff out of the ground and send it overseas, we have to wake up to the benefits of using that wealth to create more wealth, rather then use it to service borrowed foreign capital to bid up property prices.
Hi all,
WW,
Why do we have to pay it down now??? Why not wait 5-10 years and pay it off with devalued dollars, due to inflation.
With all the talk of capital being in short supply, many are forgetting that money is a creation of man and comes out of thin air. Despite the massive growth in money supply in the western economies, in China the M2 money supply grew by 28% over the last 12 months.
Everyone is doing it, creating money, it may be moving slowly at present, but history tells us it's pace will pick up leading to inflation. Because of this "everyone is doing it" phenomena, the likelyhood of our currency crashing is greatly reduced.
In an inflationary environment, we are far better off having borrowings than savings that get devalued away.
One of the points I was trying to make about the Keating banana republic was the fact that the CAD was in uncharted waters then, everything pointed to it being at a disastrous level and the whole house of cards was likely to collapse.
Yet that never happened.
There is no reason why in 20 years time the same debate will not be going on about a CAD 10 times todays size, against a record high % of GDP etc etc.
The way the world shows approval/disapproval with a countries borrowings is how the currency is valued against others. In the big picture, we are more or less exactly where we were 20 years ago against both the $US and the Pound, while a little bit behind the Yen.
bye
WW,
Why do we have to pay it down now??? Why not wait 5-10 years and pay it off with devalued dollars, due to inflation.
With all the talk of capital being in short supply, many are forgetting that money is a creation of man and comes out of thin air. Despite the massive growth in money supply in the western economies, in China the M2 money supply grew by 28% over the last 12 months.
Everyone is doing it, creating money, it may be moving slowly at present, but history tells us it's pace will pick up leading to inflation. Because of this "everyone is doing it" phenomena, the likelyhood of our currency crashing is greatly reduced.
In an inflationary environment, we are far better off having borrowings than savings that get devalued away.
One of the points I was trying to make about the Keating banana republic was the fact that the CAD was in uncharted waters then, everything pointed to it being at a disastrous level and the whole house of cards was likely to collapse.
Yet that never happened.
There is no reason why in 20 years time the same debate will not be going on about a CAD 10 times todays size, against a record high % of GDP etc etc.
The way the world shows approval/disapproval with a countries borrowings is how the currency is valued against others. In the big picture, we are more or less exactly where we were 20 years ago against both the $US and the Pound, while a little bit behind the Yen.
bye
Hi WW
Thans. It has been an interesting tpoic for discussion.
I think the main point is that nobody knows what is unsustainable in terms of a CAD. We thought it was in Keating's day as Bill mentioned. It seems as long as we have products eg resources that others want and fit the stable country example then they will probably coninue to fund us. I feel the main symptom we will see when the withdrawal of funding occurs will be a big fall in the AUD. This is what I would watch for if I was concerned.
I agree with the thesis that we should produce more but comparative advantage is a big hurdle to overcome and only occurs after a major economic crisis. The US is in that situation atm and will probably see a continued fall in USD value over the medium to long term. This will eventually give them a comparative advantage in exports such as manufacturing and the cycle begins again.
Cheers
Shane
Thans. It has been an interesting tpoic for discussion.
I think the main point is that nobody knows what is unsustainable in terms of a CAD. We thought it was in Keating's day as Bill mentioned. It seems as long as we have products eg resources that others want and fit the stable country example then they will probably coninue to fund us. I feel the main symptom we will see when the withdrawal of funding occurs will be a big fall in the AUD. This is what I would watch for if I was concerned.
I agree with the thesis that we should produce more but comparative advantage is a big hurdle to overcome and only occurs after a major economic crisis. The US is in that situation atm and will probably see a continued fall in USD value over the medium to long term. This will eventually give them a comparative advantage in exports such as manufacturing and the cycle begins again.
Cheers
Shane
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Bill,
Good point. And China is awake to this situation, hence their proposal at the G8 to use the IMFs Special Drawing Rights (SDR) as a global reserve currency. They want a reserve currency based on a basket of currencies or on a basket of commodities. They obviously don't want the USD to tank and take their reserves with it.
One of the reasons I have a sizable little hedge in gold at the moment. Too much risk of inflation since they removed the gold standard and floated fiat currencies. All this quant easing globally will come back to haunt us one day. Maybe not this year, or even next, but soon enough...
Another reason I like my debt and hard assets like resi property. The trick will be holding them if mortgage rates hike too high too fast. Watch your servicability people but stay the course. Property good, debt good, gold good, cash bad.
Cheers,
Michael
Good point.
This is what has happened in the past to countries that over-borrowed and couldn't service their debt. There was a scramble to repatriate funds & sell the currency, causing the currency to collapse. This caused inflation & higher interest rates, hurting the economy.
Let's hope we don't go down that path. Our currency is likely to remain solid thanks to the re-surging commodities boom. In a way, our economy is becoming more and more dependent on China's economy. Not a bad place to be for now...
As Michael said, the likelihood of inflation picking up in the medium term in rising quickly. Better hold hard assets like property on fixed interest rates during those times.
Cheers,
IMO, the risk is that we won't know what a safe CAD and NFD is until there is an external shock. If the world lowers support for the AUD, our interest rates are upwards bound..... If there is another credit freeze, Rudd will be issuing debt to bail banks that will be unprecedented. Unlike entering this GFC, we now have public debt.
Rudd has said net public debt will peak in 2014 at 13.8% of gdp, in dollar terms he calculates that at $300b.....
But what is 300b actually 13.8% of?
= 300/.138 = 2173b
So Rudd is expecting GDP to rise from 1.1T to 2,17T in 5years......that would be a neat trick because Australia would need to grow gdp at 14.6%pa, which we have never come close to. (if I am misunderstanding this, please correct me someone)
And what have we created with that 300b that is going to generate principal and interest to pay it back????
Nothing.....so the only way to pay it down will be via tax revenue!!!!
March09 total private and public foreign debt was 675b, 61.4% of gdp. Public debt is very likely to drive total debt to 100% of gdp in the next 5 years.
Keep in mind the IMF and ratings agencies see public debt as more of a risk than private debt. That will put upwards pressure on our interest rates, independent of what the RBA does. And those interest rates apply just as much to our public debt as our mortgages.
Winston,
I still can't see how this is a problem. Even assuming total national debt was 100% of GDP, this doesn't sound like a big deal. If I translate that to my personal balance sheet, lets assume I have $2M in debt and my income is $200K. Very rough figures. So my total debt is 1,000% of my personal GDP (or ten times higher than the country's situation). The country is running a very conservative balance sheet IMHO.
Surely debt servicing is the more important measure, than total multiples of indebtedness. And, as you've already mentioned, government debt is assumed as the risk free rate and is cheaper to service than my risk rated retail rate (say that quickly!
).Still, its all good mega-macro information. Thanks for sharing all your thoughts...
Cheers,
Michael
It isn't obvious, to me anyway, why our foreign debt is so high, and rising.
There is clearly a problem because we export bulk products with a low labour content and import complex manufactured goods. The high receipts will keep our dollar so high so that we can "afford" the imported stuff. But that doesn't rattle up a $300bil bill.
I understand what you say about borrowing funds to buy property causing a blow-out in external debt, but every time someone pays a high price for a property, someone else banks a profit. Could your explanation be a bit simplistic?
Overall though, if you believe in thinking nationally and acting individually, we should all pull our head in a little. A good start would be paying an Aussie to fix your car (or other manufactured item) instead of buying a new import, and not borrowing to the max for property, which I still believe has risks attached.
There is clearly a problem because we export bulk products with a low labour content and import complex manufactured goods. The high receipts will keep our dollar so high so that we can "afford" the imported stuff. But that doesn't rattle up a $300bil bill.
I understand what you say about borrowing funds to buy property causing a blow-out in external debt, but every time someone pays a high price for a property, someone else banks a profit. Could your explanation be a bit simplistic?
Overall though, if you believe in thinking nationally and acting individually, we should all pull our head in a little. A good start would be paying an Aussie to fix your car (or other manufactured item) instead of buying a new import, and not borrowing to the max for property, which I still believe has risks attached.
The question is: Is your income directly comparable to GDP? I don't know.
The other point is that your property is "productive" while the national debt being wasted. Would you be happy with 2 mill debt if spent on consumption? Would be happy to borrow another 100k next year, and the year after?
The wild card in letting inflation devalue debt when you have borrowed from another country is fx and how much of the debt is denominated in your dollars compared to his.
I raised earlier, China made some anaemic protestations when Obama announced his USD weakening quant easing earlier this year. I wondered why they continued to buy US bonds......it all makes sense when realize they are printing yuan faster than Obama is printing usd. For as long as they do that, US bonds keep them ahead.
Here's a chart of China M2.
If we are valued the same as 20 years ago Bill, then we have been fools for not exploiting the opportunity higher commodity exports brought us......an opportunity the US and UK didn't have. But instead of channeling that export income into becoming world leaders in solar tech, better education, or something else sustainably productive and profit generating, we channeled it into bling and foreign debt. And we are left with cities that are unable to keep infrastructure expansion up to population growth, and a welfare net that is unable to keep pace with the cost of living, especially rents.
I raised earlier, China made some anaemic protestations when Obama announced his USD weakening quant easing earlier this year. I wondered why they continued to buy US bonds......it all makes sense when realize they are printing yuan faster than Obama is printing usd. For as long as they do that, US bonds keep them ahead.
Here's a chart of China M2.
If we are valued the same as 20 years ago Bill, then we have been fools for not exploiting the opportunity higher commodity exports brought us......an opportunity the US and UK didn't have. But instead of channeling that export income into becoming world leaders in solar tech, better education, or something else sustainably productive and profit generating, we channeled it into bling and foreign debt. And we are left with cities that are unable to keep infrastructure expansion up to population growth, and a welfare net that is unable to keep pace with the cost of living, especially rents.
Winston,
I still can't see how this is a problem. Even assuming total national debt was 100% of GDP, this doesn't sound like a big deal. If I translate that to my personal balance sheet, lets assume I have $2M in debt and my income is $200K. Very rough figures. So my total debt is 1,000% of my personal GDP (or ten times higher than the country's situation). The country is running a very conservative balance sheet IMHO.
Surely debt servicing is the more important measure, than total multiples of indebtedness. And, as you've already mentioned, government debt is assumed as the risk free rate and is cheaper to service than my risk rated retail rate (say that quickly!
Still, its all good mega-macro information. Thanks for sharing all your thoughts...
Cheers,
Michael
Yes, I had the same thoughts Michael when I first started looking into.....I tried to relate it back to household finance and debt, to simplify it. And I've been trying to understand what our peak debt serviceability is, though there's little written to dumb all this stuff down for Joe's like me....
Here's a couple of points that make the country different to a household.
- Most households have a 20 odd year PPR loan to spread principal pmt over.
- Most Aussies max out DSR somewhere between 30 and 40% of gross income.
- Resi mortgages offer fixed interest.
On the country scale,
- most debt is rolling short term, and therefore subject to the same denial of refinance shock that knocked out Babcock and Brown and killed MacQuarie's high debt/low equity model.
- Australia's DSR is undoubtedly a lot lower than 40% (of gdp), as 62%GDP alone is services, the greater part of which is domestic. In fact, GDP is a seriously flawed way to measure income. 10% of gdp is made of imputed rent, i.e. the rent home owners would pay themselves if they didn't own the house. And gdp does not exclude income that goes offshore to foreign investors.
- what is the inter country equivalent of fixed interest?
Hi WW,
Exactly. This is why we don't have such a huge problem, the rest are doing it more than us. We still look like the picture of perfect economic health compared to the rest of the western world. The govt here has not needed to spend as much as the rest because they keep sending money here, for homes, business, whatever.
Of todays GDP. GDP will grow by both 'growth' and inflation over the next 20 years, so instead of $1.1t we might be talking about $4t, and record CAD/GDP of 8.5%, who knows.
Which is why they will not pull the plug on the $US, which is why the western economies can keep printing money, which is why we will have inflation ahead, which is why the CAD levels here, are not out of control, which is why property is likely to grow (in nominal dollar terms) quite well into the future as there will be so much money sloshing around the world.
bye
Exactly. This is why we don't have such a huge problem, the rest are doing it more than us. We still look like the picture of perfect economic health compared to the rest of the western world. The govt here has not needed to spend as much as the rest because they keep sending money here, for homes, business, whatever.
Of todays GDP. GDP will grow by both 'growth' and inflation over the next 20 years, so instead of $1.1t we might be talking about $4t, and record CAD/GDP of 8.5%, who knows.
Which is why they will not pull the plug on the $US, which is why the western economies can keep printing money, which is why we will have inflation ahead, which is why the CAD levels here, are not out of control, which is why property is likely to grow (in nominal dollar terms) quite well into the future as there will be so much money sloshing around the world.
bye
The charts below have the latest ABS figures available. mthly=May09, qtrly=Mar09.
The growth in export receipts has been roughly matched by import growth.
Though there has been small trade surpluses recently as industry has cut back on expansion and consumers have cut consumption.
Nevertheless, the trade balance is still overwhelmed by the interest paid on foreign debt.
The lavender line is our current account, which is like our cash flow with the rest of the world. It is derivative of the other lines.
Exports minus imports is yellow, and recently went into trade surplus, due to an ongoing GFC related drop in imports, and a more recent rise in mining exports to China.
But the trade balance was only strong enough to knock the current account deficit back from 6.6% to 3.3%.
The red line is the income account, which represents exchange of divs/profits and interest with the rest of the world. Interest paid on our debt has contributed most to its growth. The income deficit backed off somewhat recently. That was mainly due to a reduction in foreign investment in Australia (less divs going out), lower interest rates, and a stronger dollar.
Well, this is exactly what economists are saying about the US situation now. They have to increase local production, drop imports, and increase exports. Just as with a household budget, it is easy to spend and clock up debt....but infinitely harder to pay down debt. Their consumption (lifestyle) has been vendor financed for years. And the GFC has rendered them unable to serve growing debt levels.
We share more in common with the US then we don't. Like them, we have progressively moved off shore our means of production. It is going to take enormous capital investment to expand local production enough to offset our interest bill. And where is that capital going to come from when we are net debtors with negative cash flow already?
Ultimately, our current trajectory locks us into ever higher rates of foreign ownership. Do some research into how many Aussie miners have been partially sold to China in the last 3 years.
Bill, I think there's a problem with inviting 'too much' foreign investment. After all, it is indicative that we are not savvy enough to retain enough of our income to finance our own growth. Even worse, we are letting profits made from selling our assets (resources) go offshore, and losing the opportunity to leverage off them by developing future cash flow.
Nairu had a similar business model, until they ran out of resouces.....and had one of the highest rates of obesity and diabetes in the world........
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When are we likely to run out of resources though?
It seems like we are in a similar situation to the gulf states, who live on oil money, although we don't earn as much by far.
At least the gulf states have built up large overseas investments, so they have something for the future.
It does seem rather dumb that, collectively, we are basically outbidding each other on property prices, increasing our dependency on foreign investment rather than decreasing it.
Cheers,
That's the way I see it too HK. But self interest being what it is, most of us are going to keep bidding each other up hoping we aren't the last in. And I acknowledge we might go on another 20 years before any shock effects our interest rates or credit significantly.
At the end of the day though, better we have our eyes wide open about this stuff. and demand more public transparent debate from our polies and media. Once you start reading this stuff, you realize how ignorant most media are in their interpretation, and how left and right polies try to snow us on it.
I dunno that you could compare Australia's GDP to your wage.
Australia's GDP is 70% services and consumption. For example, say a coffee shop owner in Martin Place Sydney? They turn over 500k a year? They are a very important part of society, but they won't contribute to paying back Australia's debt. They are providing a service. Same with nurses, teachers, real estate agents etc. And I'm not having a go at services either. All highly efficient nations have most of their GDP as services. Think of it as a reward for being such an efficient economy that so many people can be employed in services to improve the lot of everyone.
Some backward African nation has 75% of the workforce as farm workers, and 15% employed in services.
But services aren't producing anything to pay back debt.
Your wage gets fully employed to pay back your debt. Australia's GDP output is definately not fully employed.
Perhaps your wage would be the equivalent of primary and secondary industries? Dunno..???
See ya's.
This is just posturing on the part of China. They could diversify now - they don't need IMF SDR's to do that. But they don't - they keep buying $US assets.
Thinking about it in terms of a person or a company is a good way to understand it. $2M in debt and an income of $200K though would be enormous debt load for anybody (person, company or country). I think you must be forgetting the rental income as well. $2M times 7% interest for example is $140K. That means 70% of the income ($140K / $200K) is consumed by interest.
Yes - debt servicing is definetly the more important measure. Providing the debt is building assets that generate returns larger than the interest bill then it is sustainable forever.Surely debt servicing is the more important measure, than total multiples of indebtedness. And, as you've already mentioned, government debt is assumed as the risk free rate and is cheaper to service than my risk rated retail rate (say that quickly!
My issue is as a nation we have borrowed loads of money simply to bid up existing housing stock - these assets aren't so productive - or certainly no more productive then they were before we bid the price of them up. If they were productive assets then our foreign debt servicing cost relative to GDP would not have increased. Eventually the world will catch on and stop giving us the money - but maybe not for a while yet. Our banks now have a federal government guarantee they can roam the world with looking for cash.
