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If we are so wealthy, why are we in so much debt?; After 24 consecutive years without a recession, why are Australians as deep in debt as they have ever been?
Topic Started: 6 Oct 2014, 07:23 AM (543 Views)
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If we are so wealthy, why are we in so much debt?

October 4, 2014
Paul Sheehan

After a long commodities boom, 24 consecutive years without a recession, and a historic rise in household wealth, why are Australians as deep in debt as they have ever been?

During the past 24 years of unbroken economic growth, real household debt has gone from $20,000 for every person to $80,000. The ratio of average household debt, when compared with average household income, has broadly trebled in 24 years, from 60 per cent to around 180 per cent. This takes us into new social territory.

The core driver of debt is Australia's obsession with property and over-capitalisation of housing. Australia's rate of mortgage debt is more than double that in Germany and France. It is about 50 per cent higher than in the United States and Japan. It is even comfortably higher than in the United Kingdom.

The International Monetary Fund's Global Housing Watch confirms that Australia, along with Canada and Belgium, has the most expensive housing in the world, measured by the ratio of debt to income. Even with low interest rates, the amount of household income consumed by interest payments has trebled in a generation.

The Australian Bureau of Statistics raised an alarm in May with a report entitled, 'Trend in Household Debt', which warned: "Household debt has increased nearly twice as fast as the value of household assets over the last 25 years."

Ever since, the Reserve Bank has been issuing warnings about excessive activity in the housing sector by investors, as distinct from owner-occupiers. Investors accounted for 60 per cent of all new home borrowings in Sydney in the past year. This may be good for the super funds of baby boomers but it works to the detriment of young families wanting to own their home.

Not only is there a frontal assault on first-home buyers, whose numbers have dropped to a historically low percentage of buyers, but Australia is over-invested in real estate. Federal governments have encouraged this via tax incentives for negative gearing, more tax incentives for superannuation funds, and maintaining a sustained rate of high immigration. Demand for housing has also been stimulated by a multi-billion-dollar flow of funds from Chinese buyers.

To meet demand, state and local governments in Sydney, Melbourne, Brisbane and Perth, where most of the housing pressure is felt, have had to increase both housing density in existing suburbs and urban sprawl in new developments, leading, inevitably, to more traffic stress and more congestion generally.

Young Australians are also confronting the prospect that the rising cost of their tertiary education will leave them another year older and deeper in debt.

There are ways to reduce Australia's excessive household debt levels yet the Senate is now in a state of gridlock and a majority of voters are in a state of denial about debt. They want Labor back in office.

Voters want Labor back, after six years in which it blew up the budget. Not, as it claims, to protect the nation from the 2008 financial crisis – which certainly inflicted plenty of damage in Australia – but because of a spectacular blow-out of spending.

In Labor's final year in office it spent 50 per cent more per year than in its first year in office. That is a huge increase in spending, given that the economy and tax flows did not grow by even close to 50 per cent. The difference was funded by debt.

Read more: http://www.smh.com.au/comment/if-we-are-so-wealthy-why-are-we-in-so-much-debt-20141005-10qg24.html
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DragonGM
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Greed
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Dr Watson
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Edited by Dr Watson, 6 Oct 2014, 07:32 AM.
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Denver
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It's precisely because we are wealthy that we have so much debt -- we have the wealth and income needed to service that debt.
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Drgonzo
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And the bipolar statistics about household savings rates, which is why data is bullshit - you can manipulate data to report whatever message you want it to.
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Drgonzo
6 Oct 2014, 07:56 AM
And the bipolar statistics about household savings rates, which is why data is bullshit - you can manipulate data to report whatever message you want it to.
The household savings rate lifted as the government ran up a deficit - budget deficits = non government surplus. So the data makes complete sense.

Our wealth comes from our resources (skilled labour mainly), and institutional structure. The rest is just digits in a computer screen.
(S – I) + (T - G) + (M - X) = 0
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