The truth about our debt

Wed, 11 Oct 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/1870680-024951753.html 

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The truth about our debt

Much is being made of the record level of household debt in Australia. The media is full of stories screaming about the risks of debt for the economy.

Household debt has risen from levels equivalent to around 75 per cent of annual household disposable income in the mid 1990s to close to 200 per cent today and it is an issue that sparks fears of a crash, the next recession or something equally frightening. Debt is high, for sure, but for anyone who undertakes sober and factual analysis of the household debt issue and judges the overall financial position of the household sector and not just debt, there is little to be worried about.

It is vitally important to realise that households do not take on that debt and throw the cash away. On the contrary.

Debt is used to buy assets which includes things like housing, commercial property and shares. For the bulk of the population with little or no debt, they are coincidently squirrelling away their savings and are accumulating wealth.

According to the latest data complied by the RBA, household assets are growing very strongly, aided by a building up in savings, unrelenting growth in superannuation holdings, growth in bank deposits and of course, from rising house prices. While household debt is indeed just under 200 per cent of disposable income, household holdings of financial assets, which includes superannuation, direct share holdings and deposits, is now over 400 per cent of income. This is up from around 200 per cent of income in the mid 1990s.

While it can and never will happen, this fact indicates that householders could ‘cash out’ their financial assets, pay off all their debt and still be left with a couple of trillion dollars or around 225 per cent of household disposable income in left over cash. That is a sound start to analysing the household sector’s balance sheet and puts the kybosh on the ‘debt disaster’ we hear so much about.

Now let’s look at another part of the household sector’s balance sheet, assets in housing. The total value of housing in Australia is hovering around $7 trillion – yes trillion – which is over 500 per cent of disposable income. In the mid 1990s, this ratio was under 300 per cent. This wealth accumulation in housing has been phenomenal.

It means, quite simply, that while the household debt to income ratio has risen by around 125 percentage points over 25 years, assets in housing alone have risen around 225 per cent of household income. When all household assets are tallied, they total just under 1,000 per cent of annual income, which looked at another way, is a multiple of 10.

This means that the net level of household wealth (total assets minus total liabilities) is currently just under 800 per cent of income. It has never been higher. Net assets have risen from around 450 per cent of income in the mid 1990s. Or another way, for every $1 of debt that the house sectors has, they have $5 of assets, which is a loan to value ratio of 20 per cent.

It is also important to note that the level of financial stress is low. Indeed, it has rarely been lower in the last 25 years than it is today. Bad debts are a trivial proportion of bank liabilities, borrowers are comfortably meeting repayments and a huge proportion of mortgage holders are well ahead in their repayment schedule.

Suffice to say, the focus on household debt captures only part of the story of the risks to the economy. Substantial interest rates rises would hurt the economy, to be sure, but this is the very reason why such a policy outlook is not going to happen.

But while the asset side of the household balance sheet remains healthy, the debt side will remain a non-problem.

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Thu, 19 Oct 2017

I am reluctant to bag and slag the employment data, because it is all we have when looking at the health of the labour market. But there are a few quirky bits and bobs in the news of the wonderful run of job creation over the past year.

Employment rose by a remarkably strong 3.1 per cent in the year to September, a fabulous result.

But, and it is a big but, the results are at odds with just about every other indicator in the economy. EIther they are misleading or the employment data are misleading.

One way to check it to have a look at the economy the last time annual growth in employment was above 3 per cent. This takes us to the period around 2007 and into early 2008.

In 2007, annual real GDP growth was generally around 4 to 5 per cent, as you would expect with such jobs growth. The economy was on fire!  In 2008, the CPI surged by over 4 per cent which is again as you would expect given the boom in employment. The RBA was hiking rates at an agressive pace, with the official cash rate hitting a stonking 7.25 per cent in 2008. Wow! 

What bubble? The financial sector is fighting fit

Tue, 17 Oct 2017

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/1897318-045821149.html 

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What bubble? The financial sector is fighting fit

Australia’s banking sector is in peak health and the household sector is having few if any problems managing its debt.

This is the good news from the Reserve Bank of Australia Financial Stability Report which effectively put the kybosh on the fear-mongers who continue to forecast a crisis in household debt, a crash in house prices and turmoil in the financial system and more specifically, the banks.

The key conclusion from the RBA was that “the financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

These are strong and direct words from the normally cautious RBA.

It also noted that the bank’s non-performing loans (bad debts in other words) “remain low” and bank profitability “is high”, which are the key indicators of financial stability and strength. The RBA went as far to say that “the banks also have ample access to a range of funding sources at a lower cost than a decade ago” which is fundamental to the functioning of the financial system. Nothing was presented that indicated current problems in the financial sector.

The RBA assessment can be tested from the markets, specifically bank share prices. Most evidently, bank share prices remain strong as the investment community continues to place its money where its mouth is when determining actual performance and even risks when allocating investment funds.