Tuesday, December 15, 2015

The Real Australian Debt Problem

I've long argued that private debt is a major problem for Australia and could be an even bigger concern if unemployment were to rise in 2016. There are two major ways that debt burdens could become a problem in 2016-17. Firstly, if unemployment rises and secondly, if interest rates rise. It's possible that if unemployment rises then the RBA will cut rates further, but interest payments may not be possible at all if you lose your job and have committed to a loan that is too big to handle. If this happens to enough people with loans then the rate of defaults will rise, but more importantly, the number of forced sales will increase leading to further falls in house prices and an end to the wealth effect that has helped Australians keep spending despite increased indebtedness and uncertainty.

The problem with these predictions is the relevant time frame. As Rudiger Dornbusch once said "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought". Australia has thus far avoided a negative self-reinforcing spiral where higher unemployment leads to debt defaults, housing price falls and then higher unemployment and so on. Trying to avoid such cycles is the major reason why the Rudd government decided to fiscally support the economy during 2008 and 2009. 

Leith van Onselon has written a great article over at MacroBusiness "Aussie Households Bombed on Debt". His article was based on a NATSEM report Buy Now, Pay Later: Household Debt in Australia

The report reveals:
“Australian average household debt is now four times what it was 27 years ago, rising from $60,000 to $245,000, reflecting an annual growth rate of 5.3 per cent above inflation and leaving our income growth rate of 1.3 per cent trailing in its wake”

Foreign debt is also high and the major contributor has been the banks increasing their call on overseas funds.

ScreenHunter_10741 Dec. 03 15.46

ScreenHunter_10740 Dec. 03 15.45

Household liabilities have been increasing at a greater rate than income - a simple function of increasing debt.

ScreenHunter_10915 Dec. 14 08.08

What really matters for households is the ability to service and pay down the debt. Low interest rates have helped enormously in recent years. The fact that the current level of rates is well below the average should be of some concern.

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ScreenHunter_10917 Dec. 14 08.21

Australian asset holders have largely avoided a fall in housing prices. If prices were to fall, that gap between liabilities and income will seem larger as the assets side of the balance sheet loses value.

However, the really interesting data compares the debt situation for quintiles. This shows that the median ratio has increased for all income quintiles with the low income quintile showing the biggest increase.

Once again, however, low interest rates have made the servicing of debt easier, although the situation has worsened considerably for the lowest quintile.

NATSEM concludes with the following points:

Friday, December 11, 2015

Recent Trump Cartoons

Recent Charts

Working out what the public wants governments to do in relation to climate change is a fraught business. They did after all elect the Abbott government ... 

I'm not sure that all foreign investment is a good thing, especially in established property assets. It's not just Chinese investment in this area that is a problem.

Given the deaths at music festivals it's time for the public to have a greater understanding of drug harms. Harm minimisation should be the goal. You're never going to stop experimentation; much better to treat drug-taking as a health issue rather than a criminal one.

A series of charts on housing

The household debt situation in The Netherlands and Denmark is even worse. Be interesting to see how their debt situations unwind over coming years.

 Long-term migration down.

Resource states have performed poorly over recent years 

Making a significant demographic in the United States unlikely to unvote for you is stupid

Real net national disposable income is a better indicator than GDP for measuring impact on the population ... 

What can you say about mass shootings, except that they are only the most sensational aspect of gun deaths.  

Comparing the US to Western Europe ...

Definitely not the worst in the Americas ...

Thailand surprisingly high ...

India has lower Gini Index figure than Australia - because nearly everyone is poor, despite the growth of the middle class and the extremely wealthy.

Fewer health uninsured in the United States under ObamaCare ...

Middle income in decline in the United States

China and many other countries in Asia face demographic challenges ahead ...