Property busts preceded by large run-up in household debt tend to be more severe; Australian household debt to disposable income quadrupled in 30 years
Tweet Topic Started: 10 May 2012, 09:16 PM (4,526 Views)
Based on analysis of advanced economies over the past three decades, housing busts preceded by larger run-ups in household debt tend to be more severe and protracted.
This is one finding presented in the International Monetary Fund, World Economic Outlook April 2012, titled "Growth Resuming, Dangers Remain".
Australia is not absent from the list of advanced economies who have witnessed a rapid rise in household debt. Here, we have almost quadrupled household debt as a percentage of household disposable income over the past thirty years, causing many to question if this level of debt burden is sustainable.
Most of this debt has been piled into our residential property market, which has now experienced price declines for five consecutive quarters while the growth of housing finance falls to levels not seen since records started some 35 years ago.
According to the IMF report, in the five years preceding the Great Recession (GFC) of 2007, advanced economies recorded an average household debt to income increase of 39 percentage points. A quick look at the Reserve Bank of Australia figures suggest Australia’s household debt to income ratio increased by a bit more than 37 percentage points.
Chapter 3 of the IMF report sets out to determine the relationship between household debt and the depth of economic downturns.
It found the declines in economic activity after a housing bust are not simply reflective of the decline in the asset price and the associated destruction of household wealth. It is a combination of the former and pre-bust leverage that ultimately explains the depth of the contraction. Simply put, the more household debt, the bigger the bust and this holds true regardless of a banking crisis or not. Economic downturns following high debt housing busts are also more protracted, with declining consumption lasting for at least five years.
But let's get it in context. In 1977, credit was rationed, and the first credit card (Bankcard) had just been released, interest rates were horrendous, inflation was around 10%, stagflation was still in full swing and We'd just come out of a very deep recession. Unemployment was at 6%, but we though that was pretty good compared to the 14% we'd just had. Most Australians couldn't get credit, and wouldn't have accepted if they could.
In other words, Australians were just conming out of the worst 5 years economically since the great depression. 1977 is a cherry-picked start date.
Here's a graph of Australia's total debt compared to other countries. Now does it make Australia look like a big debtor nation?
But let's get it in context. In 1977, credit was rationed, and the first credit card (Bankcard) had just been released, interest rates were horrendous, inflation was around 10%, stagflation was still in full swing and We'd just come out of a very deep recession. Unemployment was at 6%, but we though that was pretty good compared to the 14% we'd just had. Most Australians couldn't get credit, and wouldn't have accepted if they could.
In other words, Australians were just conming out of the worst 5 years economically since the great depression. 1977 is a cherry-picked start date.
Here's a graph of Australia's total debt compared to other countries. Now does it make Australia look like a big debtor nation?
The graph from the Mckinsey is misleading.
Household debt is very different to government debt for Countries like Australia, USA, UK, and Japan. In fact, lack of Government debt is a negative for households, becuase Governmetn deficits contribute to households savings. In this light, Australian debt ratios are significatly worse than most of the countries on this chart.
So to add household and government debt together in quite meaningless. Edit: Meaningless for Currency Issuer countries.
So to add household and government debt together in quite meaningless.
I disagree.
I'm a tax payer, so I know that I not only have to service my own share of the private debt, but I have to service my share of the public debt as well. If my country has borrowed money I have to help pay that debt as well through taxation. Yes I know we could just print it, but the reality is we won't do that, we will service all debts in the old fashioned method of working to repay the debt - that's what we do here, and I can't see any Australian government straying from the straight and narrow on this. So lets look at the problem from that aspect.
If we had low private debt levels we would all feel quite smug at the moment, but what is the benefit if we then have to service ever growing public debt levels. In the USA they have high private debt, and they have high public debt. It's the same in the UK and most other european nations.
If you have finished paying off your house, but your government still owes massive debts to other nations, then you are still indebted by proxy. So I rather like that graph, it gives me a truer idea of what we all collectively owe.
But I would like to know what I am responsible for as one of just over 11 million income earners in this country.
I think that a comparison between countries of the total private and government debt per worker would make an interesting comparison. Not per capita as the unemployed, the aged, the sick, the young, and other non working residents don't contribute to either the household income or the nations income.
What is the average total debt burden per worker of this country, and how does that compare to workers in other nations that we often compare ourselves to?
Any expressed market opinion is my own and is not to be taken as financial advice
High private debt = big mortgage books = systemic vulnerability = taxpayer liability
Ireland was in a tickety-boo situation prior to its property crash, as was Spain. The poor mug taxpayer then has to foot the bill for all the reckless lending and borrowing.
Aus may not end up like these countries, but high private debt is an extremely high risk and something that should be considered by all and sundry. And I remain to be convinced that just because more AUD can be created, means this is not a problem.
It's worth remembering that government debt is usually repayable at a much lower interest rate than households have to deal with. So the component of household debt will act as a stronger drag on the economy than the government debt of the same size.
So to add household and government debt together in quite meaningless.
I disagree.
I'm a tax payer, so I know that I not only have to service my own share of the private debt, but I have to service my share of the public debt as well. If my country has borrowed money I have to help pay that debt as well through taxation.
There is no financial contraint on the Federal Government, so there is no obligation to "pay the debt back via taxation". Look at the USA. It has run deficits for 190 years out of 230 years since Independence. What pressure is there for the USA to "pay back" its debt. A market interest rate of 1.8%!!! The notion it has to be paid back to not supported by any evidence from similar countries.
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Yes I know we could just print it, but the reality is we won't do that,
It is important to understand we have been printing money for 110 years. The USA has been printing money for 230 years. That is how Governments print - via spending. So the "reality" is we AREdoing that. Moreover, we will continue to do that so long as we have our current monetary system.
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If we had low private debt levels we would all feel quite smug at the moment, but what is the benefit if we then have to service ever growing public debt levels. In the USA they have high private debt, and they have high public debt. It's the same in the UK and most other european nations.
When taxes pay government interest, it is a loss of net financial assets from the private sector. But when the government pays interest, the interest payments go back into the private sector as a net financial asset. It's zero sum game from a macro perspective. But we do not have to meet the interest payments. We can continue to run deficits forever if we choose. Our only constraint as acountry is the availability of real resouces. That is a massive difference compared to households. They DO have to meet all interest payments over time. They DO have to balance their budgets, because Households (like Greece) are currency users.
Government deficits add to household savings & in a growing economy, savings must grow over time. So to pay it back is to ask the private sector (including households) to reduce its store of savings.
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If you have finished paying off your house, but your government still owes massive debts to other nations, then you are still indebted by proxy. So I rather like that graph, it gives me a truer idea of what we all collectively owe.
As I said - we never need to pay-off Government debt. It is the same as saying "we need to reduced private savings". It is the wrong perspective.
Did I read on here the other day (I think GenX may have posted it) that Australian household debt as a percentage of income is actually decreasing? Tis could be due to increases in income, but surely this is deleveraging at work? I'm curious to see how far this deleveraging goes.
High private debt = big mortgage books = systemic vulnerability = taxpayer liability
Agree with this except taxpayers never have a liability in the same way the private sector has a liability. The Federal Government can stand behind any quantum of AUD liabilities in our financial system & it does not mean taxes must go up. The government in not revenue constrained.
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Ireland was in a tickety-boo situation prior to its property crash, as was Spain. The poor mug taxpayer then has to foot the bill for all the reckless lending and borrowing.
Spain and Ireland are currency users. Australia is a currency issuer. Big difference.
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Aus may not end up like these countries, but high private debt is an extremely high risk and something that should be considered by all and sundry. And I remain to be convinced that just because more AUD can be created, means this is not a problem.
Just because we can issue as many AUD's we want, does not mean there is no problem. There will be a problem. It's just the problem will not be "Australia has run out of money". The problem could be political (ie: Australia may think it can run out of money), or inflation (Australia deficit spends too much).
Did I read on here the other day (I think GenX may have posted it) that Australian household debt as a percentage of income is actually decreasing? Tis could be due to increases in income, but surely this is deleveraging at work? I'm curious to see how far this deleveraging goes.
We have been deleveraging because the Government has run a deficit. The Government seems intent on stopping this process.
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