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Deleveraging has not even started in Australia; Best defence is to reduce your debt
Topic Started: 30 May 2012, 02:11 AM (1,719 Views)
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Best defence is to reduce your debt

People from all walks of life are feeling the pinch as the global economy falters.

The cloud hanging over the natural optimism of most Australians seems to fly in the face of reality. The OECD released a report this week that forecasts Australia's economy will outperform almost all developed countries during the next two years, yet people feel pessimistic and apprehensive about the future.

Of course the global backdrop is worrying. A Greek exit from the eurozone and weak US and Chinese economic data are among the chief concerns. Australian share prices are down about 8 per cent during the past month, with house prices flat or slightly down.

Even so, our economy remains relatively strong and unemployment is low - at least as measured by the Australian Bureau of Statistics.

But Australians are as pessimistic as those Europeans living in countries with economies in big trouble.

How could it be that they feel so financially insecure when the economy is relatively strong? Or are we just a nation of whingers?

Economists have possible explanations, including higher prices for essential goods, high levels of personal debt and higher levels of unemployment - or under-employment - in a patchwork economy than indicated by official statistics.

A Boston Consulting Group survey of nine developed countries plus China shows that 47 per cent of Australian respondents said they were either ''in financial trouble'' or ''not financially secure''. Italians and Spaniards are more upbeat, even though Spain, for example, has an unemployment rate of 25 per cent.

''Australians are feeling the costs-of-living pressures,'' the head of investment research at Perpetual, Matt Sherwood, says. Electricity prices are rising and food prices are already high by international standards, Sherwood says.

Then there is household debt. ''In the good times we borrowed more and more to have one of the highest ratios of household debt to income in the world,'' he says.

''While those ratios have come down substantially in the United States and Britain, the deleveraging has not even started in Australia.''

Read more: http://www.smh.com.au/money/best-defence-is-to-reduce-your-debt-20120525-1z9yt.html#ixzz1wGtXIAVy
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Dr Watson
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Other countries — such as the US, Ireland and Spain — have deflated their bubbles. Australia has not. Median house prices in Melbourne — probably the worst-performing capital city — have deflated by a mere 9%. If the international experience is any guide, our housing market has a lot further to fall.

Hold on tight.
Edited by Dr Watson, 30 May 2012, 03:12 PM.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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NotFooled
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Dr Watson
30 May 2012, 03:10 PM
Other countries, such as the US, Ireland and Spain have deflated their bubbles. Australia has not. Median house prices in Melbourne, probably the worst-performing city, have been deflated by only 9%. If the international experience is any guide, our housing market has a lot further to fall. Hold on tight.
Alternatively, Australia looks like it will ride out the downturn long enough for other markets to recover.
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peter fraser
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Dr Watson
30 May 2012, 03:10 PM
Other countries, such as the US, Ireland and Spain have deflated their bubbles. Australia has not. Median house prices in Melbourne, probably the worst-performing city, have been deflated by only 9%. If the international experience is any guide, our housing market has a lot further to fall. Hold on tight.
The truth is Doc most Ozzie homeowners are deleveraging like crazy, but not by selling the family home. They are madly consolidating debts and getting rid of any short term revolving credit at 18% and adding it to their home loan at 6%.

Deleveraging can come in many forms, and if the basic goal is to reduce monthly commitments, then that is much easier for a home owner with equity than for a non home owner - they can only switch to a lower rate credit card at say 8% but that is only available if they have maintained a good balance sheet.

When a home owner with good equity has a problem he has options if he acts quickly, but when a non home owner gets into financial difficulty, then there are very few options.

Any expressed market opinion is my own and is not to be taken as financial advice
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miw
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peter fraser
30 May 2012, 03:20 PM
The truth is Doc most Ozzie homeowners are deleveraging like crazy, but not by selling the family home. They are madly consolidating debts and getting rid of any short term revolving credit at 18% and adding it to their home loan at 6%.

Deleveraging can come in many forms, and if the basic goal is to reduce monthly commitments, then that is much easier for a home owner with equity than for a non home owner - they can only switch to a lower rate credit card at say 8% but that is only available if they have maintained a good balance sheet.

When a home owner with good equity has a problem he has options if he acts quickly, but when a non home owner gets into financial difficulty, then there are very few options.
One thing that surprised me a little when I had a look at the composition of Australian private debt was the relatively low and fairly stable amount of consumer debt in there (i.e. credit cards and personal loans). Only about 10% of GDP. This is the part that can and does get deleveraged quickly when consumer sentiment drops. Bad news for retailers for sure, but I am not sure what impact it will have on the property market.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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Dr Watson
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miw
30 May 2012, 03:27 PM
One thing that surprised me a little when I had a look at the composition of Australian private debt was the relatively low and fairly stable amount of consumer debt in there (i.e. credit cards and personal loans). Only about 10% of GDP. This is the part that can and does get deleveraged quickly when consumer sentiment drops. Bad news for retailers for sure, but I am not sure what impact it will have on the property market.
Retailers will close. People will lose their jobs. Homes will be sold. House prices will fall.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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peter fraser
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miw
30 May 2012, 03:27 PM
peter fraser
30 May 2012, 03:20 PM
The truth is Doc most Ozzie homeowners are deleveraging like crazy, but not by selling the family home. They are madly consolidating debts and getting rid of any short term revolving credit at 18% and adding it to their home loan at 6%.

Deleveraging can come in many forms, and if the basic goal is to reduce monthly commitments, then that is much easier for a home owner with equity than for a non home owner - they can only switch to a lower rate credit card at say 8% but that is only available if they have maintained a good balance sheet.

When a home owner with good equity has a problem he has options if he acts quickly, but when a non home owner gets into financial difficulty, then there are very few options.
One thing that surprised me a little when I had a look at the composition of Australian private debt was the relatively low and fairly stable amount of consumer debt in there (i.e. credit cards and personal loans). Only about 10% of GDP. This is the part that can and does get deleveraged quickly when consumer sentiment drops. Bad news for retailers for sure, but I am not sure what impact it will have on the property market.
With debt consolidation and interest rates falling from circa 7.5% to 5.5% the average home owner will be reducing his/her monthly commitment considerably, at least the most vunerable ones will get the greatest benefit.

I regularly see people with more than 6 credit cards. That plus a home loan and a car loan and they really struggle to meet monthly commitments and live, but it can often be fixed.

On the positive side I also see people with big credit card limits but no debt on them.

A credit card in the wrong hands can do a lot of damage to a family, but it's perfectly safe in the right hands.



Any expressed market opinion is my own and is not to be taken as financial advice
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genX
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miw
30 May 2012, 03:27 PM
One thing that surprised me a little when I had a look at the composition of Australian private debt was the relatively low and fairly stable amount of consumer debt in there (i.e. credit cards and personal loans). Only about 10% of GDP. This is the part that can and does get deleveraged quickly when consumer sentiment drops.
I'm pretty sure it is about access. Credit cards in Australia are fairly subdued compared to somewhere like the US, even the UK. Ever see that John Travolta movie with him as an 'Ambulance Chaser' lawyer? They finance their case by applying for and receiving 500 different credit cards. When I was in the US I was amazed at not only CC availability, but also store cards, vendor finance etc etc. You get some of that in Australia, but not much. You have very few card issuers and a pretty strong credit reporting system.

I knew some people in Hong Kong that would do a kind of 'deleveraging' on their credit card by transferring the balance to a new card whenever the introductory rate/free period ran out. So get the 3-4% intro rate for 6-12months, pay the monthly minimum then transfer the balance to a new card. lol, Hongkies. My friends in HK rode out an entire 2 year recession using this strategy (and then continued to use it after as well :D ) In Oz you could probably do that 3 or 4 times before the end of the road, and after that the big 4 wouldn't give you the intro rate again.

Once you pay down your cards though, you are still left with the mortgage. Lets say you have 20 grand of CC debt, the monthly minimum on that is probably ~350-400. I guess that could take some pressure off your finances if you can pay that down to zero. But if you have a 800K principal outstanding mortgage, that's ~5100 a month. Not really in the same ballpark.
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Bad news for retailers for sure, but I am not sure what impact it will have on the property market.

If retailers start retrenching people, then the arrears rate will climb, and the bottom and the top of the market will diverge. The bottom of the market will collapse, and the 1% will get richer. And the right wing wet dream of a Banana Republic will be just a little bit closer.
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Pig Iron
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peter fraser
30 May 2012, 03:35 PM
With debt consolidation and interest rates falling from circa 7.5% to 5.5% the average home owner will be reducing his/her monthly commitment considerably, at least the most vunerable ones will get the greatest benefit.

I regularly see people with more than 6 credit cards. That plus a home loan and a car loan and they really struggle to meet monthly commitments and live, but it can often be fixed.

On the positive side I also see people with big credit card limits but no debt on them.

A credit card in the wrong hands can do a lot of damage to a family, but it's perfectly safe in the right hands.


credit cards can be a great tool in the right hands. I live on mine and pay it off in full each month before the interest free period expires - i've never paid a cent in interest in more than 15 years.
by using the banks money on a interest free basis and leaving the money in my offset account saving me ~6.5% on my home loan it saves me a few hundred bucks each year. and i get points which i use to splurge on stuff once a year.
I am the love child of Tony Abbott and Pauline Hanson
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peter fraser
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It would appear at first glance that credit card debt and personal loan debt is falling.

http://www.rba.gov.au/statistics/frequency/fin-agg/2012/fin-agg-0412.html

Home loan growth is slow.

Any expressed market opinion is my own and is not to be taken as financial advice
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