‘How Risky is Australian Household Debt?’

Discussion in 'Markets & Economies' started by mmm....shiney!, Aug 27, 2020.

  1. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    A recent report from the RBA, it counters the views of people like Martin North etc so if you're either in the crash camp with North and the RE bears, or the she'll be fine camp with the RE bulls it's probably a good read if you want to make sure you're making investment decisions based upon as much information as possible. Without getting mental whiteout. :p

    The report looks at the last 20 years of RE and the debt to income ratio of Australians. There's some interesting stats presented eg Australia has the highest level of rental property ownership held by households in the world whereas the rental supply in other countries is made up of a greater proportion of corporate and government landlords which I didn't know.

    Basically their conclusion is that DTI ratios in Australia do not point to a higher risk and that banks are well positioned to deal with a severe downturn in the economy, consumer spending is the most likely casualty in the event of a severe and prolonged downturn.

    The paper seeks to answer these three questions:

    1. Why is household debt in Australia relatively high compared with other countries, and what are the main reasons it has increased over time?

    2. How big are the risks this debt poses to the banking system?

    3. How might this debt shape the response of consumer spending to severe downturns in the economy?

    Non-technical summary: https://rba.gov.au/publications/rdp/2020/2020-05/rdp-2020-05-non-technical-summary.pdf

    Report with tables and formulae with funny shapes: https://rba.gov.au/publications/rdp/2020/2020-05/rdp-2020-05-non-technical-summary.pdf
     
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  2. sammysilver

    sammysilver Well-Known Member Silver Stacker

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    You mention debt and income but not savings. Some of the RE debt is offset by equity in the property. In addition there is a considerable amount in superannuation across most households. It would make sense to offset some of the RE debt with super savings possibly within the same banking institution. Both separate but still linked.
     
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  3. leo25

    leo25 Well-Known Member Silver Stacker

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    Debt poses zero risk to the banking system, if it did the system would have fallen apart a long time ago. If a major bank reserves gets low, the central bank will fix it with a few key strokes. This has been the standard practice across the world since 2008 and i can't see why it will suddenly change.

    Central banks are constantly in contact with major banks to make sure they always have enough reserves. That's how they keep rates at more or less zero.
     
  4. JulieW

    JulieW Well-Known Member Silver Stacker

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    I don't have a link reference, but I've seen figures showing something like we're a third renters, a third mortgagees and a third owners. In this, the mortgagees are on average a couple of years ahead in payments (probably to do with offset/redraw loan facilities).

    If these sort of figures are close to accurate, then the household debt and precarious lenders might be smaller than most doomsday pundits estimate. Keating's concept of the pillars of banking seems to have worked out overall, and his superannuation plan has created a practical parachute for many.

    Anecdotally, I find most friends and acquaintances are fairly optimistic about the future. Personally I think the negative effects of the Covid lockdowns will be much greater than many estimate - in certain demographics, - but in the larger picture I expect a couple of years before the future looks realistically brighter.

    Unfortunately our politicians are involved in the recovery and that could complicate things. I can't imagine how they plan to fix the Covid deficit, although if Labor gets in, their previous taxation platform could be a useful starting point. I'd also hope they'd grab the initiative for a resources tax. Fairly simple solutions but with politics in the picture it might be a lot more complicated than that.
     
  5. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Remembering though that national governments are not revenue constrained, so the tax system is really just a tool by which governments control the amount of available capital in the real economy (private sector). As we are currently in a balance-sheet recession, the last thing that the real economy needs is for the government to be extracting capital from the private sector. What is required is for the government to be issuing more currency. Bill Mitchell is calling for an extra $100 billion!

    So Labor's tax plans and a MRRT would be devastating.

    And this is the problem we face, those on the left of the political divide would rather see the Earth implode before giving any extra $ to corporations and privateers by way of tax cuts.
     
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  6. Stoic Phoenix

    Stoic Phoenix Well-Known Member Silver Stacker

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  7. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Lol, that’s left field. :D
     
  8. SilverDJ

    SilverDJ Well-Known Member

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    Why did the NAB CEO recently come out and say that people in mortgage stress should think about getting out now?, or something to that effect.
     
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  9. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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  10. JulieW

    JulieW Well-Known Member Silver Stacker

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    This is from 'Barefoot Investor', someone with a large audience.

    The warning from NAB appears to be that market value will drop below loan values BIGTIME, and all those homeowners will lose their homes and be saddled with large mortgages.

    I can't interpret his last words any other way. The bolding is mine but this is the crux of the matter.

    With Barefoot Investor giving out the warning, there'll be a lot of followers of that course of action, result, of course, is more exits, more defaults and more carnage.

    “Get out now.”

    That’s the advice the CEO of NAB has given to homeowners who are struggling to make their repayments.

    Yes, in his quarterly trading update last week, NAB’s new-ish chief, Ross McEwan, warned:

    “There will be some circumstances where people are better off selling out early and taking some equity out of their homes, or keeping some equity, before it disappears.”

    While most of the media didn’t give his words much attention, there are two good reasons that you and I should:

    First, because in all the years I’ve been doing this column I’ve never heard a bank boss speak so candidly.

    Bank bosses are basically politicians: they get parachuted into the top job, stay there for five years, and rocket out with $40 million. Their main job is to stick to the script: “keep lending”. (And we’ve all witnessed how bad things go when bank bosses go off script, like getting into wealth management.)

    So why is NAB’s CEO sticking his neck out?

    Well, that brings me to my second point: he obviously doesn’t like what he sees on the horizon.

    And know this: McEwan isn’t peering into a cloudy crystal ball. Over the years NAB has invested billions into tracking its customers’ every financial move. In fact, all the banks have incredibly detailed customer analytics that tell them what people are doing — or not doing — with their money, in real time.

    Now, according to the banking regulator, APRA, roughly 1 in 10 mortgages in Australia are paused.

    Which gets me thinking ...

    On one side, how long can the banks cop 10% of their customers not paying?

    On the other, when will customers who are really struggling finally bite the bullet?


    It’s a grim situation.

    My hunch is that the banks are betting that the overwhelming majority of their customers will get through this. Yet they also know a small number of their customers won’t, and so they (well at least Ross McEwan) are turning up the heat on them.

    My advice?

    Please don’t misquote me: I am not saying you should sell your home.

    What I am saying is don’t be a frog … if you were in hot water before COVID hit, don’t just sit there bubbling away.

    We’re still early on in this crisis, and you have more options than you think. And if you want someone independent (and free!) to walk beside you and carefully lay out your options, call the National Debt Helpline on 1800 007 007 and speak to a financial counsellor (like me) immediately.

    The last word goes to McEwan:

    “We’ve seen in other crises around the world, when people try to hold on they end up walking away with nothing.”

    Don’t say you haven’t been warned.
     
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  11. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    https://www.apra.gov.au/temporary-loan-repayment-deferrals-due-to-covid-19-june-2020

    July's report should be out in the next week or so.
     
  12. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Here's another way of looking at it.

    In one of my former lives I was involved in a business associated with the seafood industry. When ever our peak body wanted to get government support for the industry it would always release a media statement warning of the devastation that would be reeked upon consumers should the government fail to provide assistance or proceed with some planned legislation. ;)
     
  13. bubblebobble2

    bubblebobble2 Well-Known Member Silver Stacker

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    We can't have household debts.... ask Joe Hockey

    HOUSING BOOM!!!

    as well as

    MINING BOOM !!!
     
  14. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Latest report:

    snip

    https://www.apra.gov.au/temporary-l...due-to-covid-19-dashboards-accessible-version

    Temporary loan repayment deferrals - Industry Publication - July.png

    Temporary loan repayment deferrals - Industry Publication - July.png
     
  15. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    And just to keep things in perspective, the view from the other side of the room, by ABC reporter David Taylor:

    Friday 5 April 2019 :p

    Full story here

     
  16. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    From APRA:

    snip

    Screen Shot 2020-10-09 at 4.15.36 pm.png

    On a side note, we recently went to Brisvegas and of course jumped on a Rivercat and noticed that the BOQ's headquarters is smack bang in the middle of a billion units along the waterfront in Newstead. Do you reckon this would account for the fact that they've got the largest share of total loans subject to deferral? After all those places went up overnight and seriously...it's not exactly brimming with life during daylight hours.

    Screen Shot 2020-10-09 at 4.24.56 pm.png

    https://www.apra.gov.au/temporary-loan-repayment-deferrals-due-to-covid-19-august-2020
     
  17. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    Wow.
    That is the most sensible thing I have ever seen you say on this forum.
    I actually agree... right up to the point where you advocate a Labor tax system as being useful... which is very funny. :p
     
  18. Mill3d

    Mill3d Member

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    Like a lot of what so-called “leftwing” reality is, the parasitic extraction aspect comes to bear in mathematics.

    Such schemes are promoted in terms of human relationships and aspiration, but at its heart, these are cold hearted financial thoughts by people interested in themselves
     
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  19. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    To
    Absolutely.
    And lefty politics is certainly the lowest of low in terms of morality. Shameful.
     
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  20. Mill3d

    Mill3d Member

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    At the heart of it is the act of lying itself
     
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