Will Australia become a Capital Exporter?; Mortgage holders have more cash than official figures recognise - money held in offset & redraw not accounted for by ABS
Tweet Topic Started: 6 Sep 2013, 08:49 AM (9,743 Views)
Like the rise in the Australian dollar, the dramatic increase in the Australian household savings rate and retained earnings funding the mining boom (or alternatively an unrecognised but substantial credit contraction) has contributed to slower economic growth through lower consumption and less financial intermediation. It has also, more importantly, led to a much stronger economy with corporations and households now in better shape to handle any substantial downturn. Much of the excess of the early 2000s has been taken from the economy through the discipline of Australian households and the strength of commodity prices.
As we look forward, however, low interest rates do pose a risk to the medium-term sustainability of this outcome. Households, increasingly, seem keen to have savings earn more than the current cash rate. This has seen a strong bid in Australian equities and to a lesser extent house prices. Effectively, the RBA seems to be happy with the following trade-off: higher activity levels as savings are transformed into equity and housing with some weakening in household balance sheets.
The rise in the Australian savings rate has been the stand-out feature of the last five years in this economy. It has weighed on growth but made the economy stronger, it would be a shame to see it unwound. Either Australia maintains current savings levels and becomes a capital exporter through a current account surplus, or Australia transforms its savings to invest heavily in productive capacity.
An interesting article from abundant world written by James White suggests that Australian mortgage holders are holding a lot more cash than the official figures recognise, because money held in offsets and redraws is not correctly accounted for in the ABS data.
I think that shadow may have made this point earlier. In aggregate Australians are now 21 months ahead in their payments on their home loans.
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The basic story: the credit contraction in Australia was much deeper than we’ve originally thought, but now the expansion is running much stronger than the ABS has told us. UBS has published a piece that goes to the heart of this story, presumably it will be picked up by the media. A quote from the UBS piece:
Mortgage redraws, accrued interest and fees are another significant part of mortgage credit growth which is rarely seen. Across the banks this accounts for around one-third of all mortgage extensions. However, we believe that these mortgage extensions are not picked up in the ABS housing commitment statistics.
Household savings
Household savings are crucial to understanding the shift to lower growth in the Australian economy. The rise in the Australian savings rate has been well above expectations and has occurred at a time of globally low interest rates. It is well above the savings rate in the United States, UK and Canada where conditions have been worse. Between 2002 and 2007, a time of a rising dollar but low savings, growth averaged 3.5% per annum. In the period since, with a rising dollar but savings at 10% of disposable income, growth has averaged just 2.7%. Savings is the smoking gun in slower growth. It has forced the leakage from the economy.
The sudden growth in savings was probably as a result of the budget deficits, and with both parties promising deficits for the next decade, savings should grow even more, which would allow Australian households to fund our own banking needs and possibly export finance abroad.
An interesting article from abundant world written by James White suggests that Australian mortgage holders are holding a lot more cash than the official figures recognise, because money held in offsets and redraws is not correctly accounted for in the ABS data.
I think that shadow may have made this point earlier. In aggregate Australians are now 21 months ahead in their payments on their home loans.
The sudden growth in savings was probably as a result of the budget deficits, and with both parties promising deficits for the next decade, savings should grow even more, which would allow Australian households to fund our own banking needs and possibly export finance abroad.
Great article. It addresses the complaints made by Pauk and others that 'outright ownership' has decreased which they claim proves housing is less affordable.
Interestingly, outright ownership has fallen by a similar amount to what is held in offset accounts and mortgage redraw buffers...
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the RBA’s recent Financial Stability Review that seemed to suggest that the chart above might not tell the full story. According to the chart below, Australians hold about 14% of outstanding home loans in offset or redraw facilities. This is equivalent to about 21 months of interest payments. This is new data that I don’t believe the market has previously been made aware of. Previous Financial Stability Reviews have not provided this statistic. The redraw and offset account facilities are an important feature of the Australian housing market.
From a household perspective, these accounts represent savings or less debt. From a statistical perspective, however, the value of savings in offset or redraw accounts are not subtracted from the level of outstanding debt because the line of credit remains open. By including the pre-payments in the household debt to income ratio, the numerator falls by $200bn, putting the ratio at 127%, some 20ppts lower than the current level. The cost of debt servicing falls to around 8% of disposable income.
The implications of such a fall in the effective household debt to disposable income are twofold.
First, Australian household balance sheets have improved more substantially than many have thought. Debt to income ratios are closer to the levels seen in 2002 despite much lower interest rates. It’s not just the national economy but also its households that are now much stronger. It’s also the case, however, that credit might have contracted for much of the last four years which makes the growth outcome very positive for Australia.
Second, there may be an increased likelihood that the market and RBA misinterprets credit statistics if recent shifts to purchase higher yielding assets (equities and property) continue. Recently, credit growth has been subdued at less than 5% annual growth. But, this analysis would suggest that while new credit growth may be subdued, net credit growth could be rising more quickly.
If people choose to keep their mortgage facility open and save via offset and redraw, rather than closing their mortgage and saving in a traditional savings account, you don't believe this will have any impact of the proportion of homeowners with a mortgage vs outright owners?
This ties in well with macro over the past 5 years. Government deficits, domestic investment, and a narrowing of the CAD all add to savings - yet the debt / income charts did not show it.
Plenty of people here have suggested offset accounts and re-draws explained the difference (I think Sydneyite was onto this a couple of years ago).
The only problem I have is I recently used some contacts to get one of the major banks to tally the total amount sitting in offset accounts relative to the mortgage book - and that number was only 3% ($10bn on $300bn). It didn't seem right to me, but the bank in question was adamant the number was right.
I recently used some contacts to get one of the major banks to tally the total amount sitting in offset accounts relative to the mortgage book - and that number was only 3% ($10bn on $300bn). It didn't seem right to me, but the bank in question was adamant the number was right.
Did you ask specifically for offsets only? Or also redraw facilities?
I recently used some contacts to get one of the major banks to tally the total amount sitting in offset accounts relative to the mortgage book - and that number was only 3% ($10bn on $300bn). It didn't seem right to me, but the bank in question was adamant the number was right.
Did you ask specifically for offsets only? Or also redraw facilities?
This is an important point - I ask for offsets only. I would have thought offsets would be a bigger number.
Note, Australia is unique in having offset accounts. So it is likley it does not get picked up by the RBA in the credit aggregates.
Edit: I will go back and ask today. (It took a few weeks to get an answer last time).
This is an important point - I ask for offsets only. I would have thought offsets would be a bigger number.
Note, Australia is unique in having offset accounts. So it is likley it does not get picked up by the RBA in the credit aggregates.
Edit: I will go back and ask today. (It took a few weeks to get an answer last time).
Redraw is simpler for most people... you just transfer all your pay into the mortgage and then redraw what you need to live on each month. Also most people don't know about the tax advantages of using offset if you later decide to turn the PPOR into an IP, so they just pay off the PPOR mortgage as fast as possible. So I would have thought redraw is probably more common. Offset is a bit more complicated, you need to specify an account, possibly set up a new joint savings account if you're a couple rather than having to choose which partner's account to use as the offset. Redraw is simple - you just pay more than necessary into the home loan each month. When we bought our first home my wife and I just transferred 100% our pay from each of our personal accounts directly into the mortgage each month, then redrew what we needed as we needed it... no offset account (we didn't know about the tax advantages of offset either in those days).
From a household perspective, these accounts represent savings or less debt. From a statistical perspective, however, the value of savings in offset or redraw accounts are not subtracted from the level of outstanding debt because the line of credit remains open. By including the pre-payments in the household debt to income ratio, the numerator falls by $200bn, putting the ratio at 127%, some 20ppts lower than the current level. The cost of debt servicing falls to around 8% of disposable income.
This is interesting and if you read the last couple of reports from the RBA they do struggle with the fact that the debt to income sits at 150%. I wonder how common offset accounts are in Europe and elsewhere.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
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