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article imageOp-Ed: Australians are now the biggest borrowers in the world

By Paul Wallis     Dec 26, 2009 in Business
“Once a jolly banker/Couldn’t get their numbers right”…. The old folk song is so true. Australia’s Reserve Bank changed roles from Roadrunner to Wile. E. Coyote with ease. Australians now owe $56000 per head, compared to $44,000 for Americans.
It's a pretty hideous story. Our “recovery” and “growth” turn out to be debt based. Like one of the cartoons where the coyote keeps running for a while over going over the cliff, Australia’s debt is now more than GDP. 90 per cent of that debt is tied up in mortgages. The rest is various forms of personal debt.
What's much worse is that these figures have apparently been sitting around for a while, gathering accolades, not concern.
Now- the story here is that:
1. Australia’s GDP is just over $1 trillion per year.
2. Net debt is $1.2 trillion.
3. There are only 21 million people in the entire country.
4. The housing market was propped up by a Federal and State First Home Buyers grant for a year or so, which has apparently added fuel to the situation as interest rates rise.
5. Most houses are ridiculously overpriced anyway.
6. Debt levels currently account for 39% of income.
7. Stress levels on debts kick in according to analysts at 41%.
8. Severe stress starts at 43%.
Australia has been blowing its own trumpet about its economic performance for a while now, but the next tune is likely to be “Taps”, unless somebody gets their finger out. This is way too close to the bone to be healthy.
A high level of debt of this type is pretty normal in any modern economy. Debt and credit are usual economic prostheses. However, in this case, the fact that so much debt is tied up in a potentially volatile housing market isn’t good news for anyone.
The next Black Saturday bushfire could be in the housing market.
The trouble is that while everyone’s happily doing GDP like an Irish stew, just adding everything, there doesn’t seem to be any measure of actual equity. (Equity is what you own after debts.)
That’s sort of a pity, because it would give a much more accurate picture of the economy. The theory that all debts become equally or higher valued assets over time doesn’t necessarily stand up, unless you’re talking decades or buying and selling rapidly in a boom. Otherwise, your break even point is some distance away, and until you hit it, you’re actually buying a loss.
So knowing actual equity values might help pin down exactly how dangerous this huge debt based market situation is. Presumably somebody other than banks does have owner equity in this 900 billion fruitcake. If you know how much is equity, you can measure how serious the problem is.
The economic management factor, however, is less hilarious than the mere fact of possible national crash and burn. If you tried doing a business plan for a fruit stall like this, you’d get laughed out of any bank if you went for a loan. (Imagine writing a business plan where you have no idea of your asset values, with a potential market plunge in plain sight.) Yet the Reserve Bank of Australia has somehow managed to approve three successive rate rises, in this environment. Each rate rise is theoretically a step closer to a tipping point.
This is a really lousy time for the RBA to decide to start being selective with its interpretations of economic situations. We’re on the cusp, next year, of the first wave of Baby Boomer retirements. There’s a lot of capital up in the air. Debt, savings, and equity are the big issues, and we don’t seem to have a clear picture of any of them except debt, and that’s noticeably blurry in some areas.
If the housing market crashes, it will take with it:
1. Home equity values
2. Bank asset values
3. The stock market
4. Employment
5. The difference between old and new market prices, which could be huge.
So if a bank lends $500,000, forecloses, and eventually sells for $350,000 after equity and interest reconciliation, it loses 30%. However, that also means that the resale value is under 70% of the original market price.
If you knock more than 30% off the current $900 billion value of Australian mortgages, you’re looking at a black hole, not a writedown.
Australia has been playing Monopoly for too long, and playing it very badly. There’s no capital gains tax on sale of residences, so the family home has been progressing nicely, if insanely, as a means of capital creation, with big vertical price rises the usual result.. The result is a form of dependency which has now locked in the entire economy. Superannuation, and other comparatively sane forms of capital saving and wealth creation, aren’t in this league.
Australia’s super is worth more than the GDP of some countries, but the housing market supports a huge slice of the Australian economy, including employment. If it tips over, it’ll be as bad as the US. It’ll also take the share market with it, knocking out a huge amount of superannuation capital, and seriously affecting the retiring Baby Boomers, which will pass on to revenue demand for welfare and pensions.
The revenue won’t be there, because of the loss of lending capital and employment incomes, as in the US scenario. At this stage the debt factor has effectively crippled the entire economy.
The RBA, like most central banks, is stuck with the interest rate method as its only effective control. Thanks to monetarism, (which is economically “LEGO for Losers”), there are no real concepts of things like cutting overheads, reducing costs to business, creating viable methods of creating personal capital, etc. Everything equates to just moving the same damn figure around and hoping it achieves something.
May one suggest that at the next RBA meeting, rather than singing a few more rousing choruses of “Nearer my monthly press release to thee”, someone goes to work on pinning down the actual risk factors, and perhaps even condescending to provide Treasury and the government with some hard data?
Another innovation would be finding ways of both reducing the impacts and increasing incentives on savings, disposable income and business capital by waking up once or twice a decade and doing the sort of studies the RBA is supposed to be doing in those areas. The RBA charter doesn’t say a word about being a spectator.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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