This article was written on 10 October 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/why-worry-household-debt-190036599.html
Why are we so worried about household debt?
The discussion of household debt and how it is meant to be the catalyst for a recession, house price crash or some other melodramatic catastrophe, is one sided, dull and invariably driven by purveyors of snake oil.
Sure, the level of household debt in Australia is higher than it has ever been, and the average Australian householder has more debt relative to their income than just about anyone else in the world.
But so what?
In isolation, this might be scary stuff. A worry. The reason why the Australian economy is at risk of an almighty collapse.
In context, however, there is very little to be worried about given the remarkable level of assets and accumulated wealth that debt is benchmarked against. In other words, the level of debt is a meaningless number unless it is benchmarked against the other side of the ledger – assets and wealth.
Household debt: Setting the facts straight
Here are some basic facts about household debt and wealth in Australia at the moment.
Household debt is 190 per cent of household disposable income.
Against this, the level of household wealth in the ownership of dwellings is approximately 500 per cent of household disposable income, even allowing for the fall in house prices between the middle of 2017 and the middle of 2019.
In addition to that are so-called household financial assets, which includes things like superannuation balances, bank deposits, direct share holdings and the like. The value of these assets is approximately 430 per cent of household disposable income.
This means the level of gross household wealth is around 930 per cent of income which, quite plainly, swamps the 190 per cent of household debt.
In turn, this means ‘net’ household wealth – which is the sum of all assets minus all liabilities (debt) is approximately 750 per cent of income.
This article was written on 14 October 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/ignore-government-debt-225040404.html
‘Utterly desperate’: Why Scott Morrison wants you to ignore government debt
When it comes to government debt, the Morrison government is desperate for you to keep your eyes and ears closes and ignore the facts.
These facts are likely to be defined by Prime Minister Morrison as being ‘in the Canberra bubble’ and therefore not worth talking about.
So what is happening with government debt? You know, the government debt that when the Liberal Party was in opposition and Labor were in power was “a disaster”, that was “undermining our kid’s future” and threatened to “ruin the economy”.
When in Opposition, the Liberal Party promised to return to the budget to surplus and to “pay off Labor’s debt”. It was a promise that created and then reinforced a perception, at least in the mind of some voters, that the Liberal Party is a better economic manager than Labor. This perception has been a critical factor in the Coalition winning the last three elections in 2013, 2016 and most recently in 2019.
Last week, updated data on government debt were released which allowed for an up to the minute assessment of how those promises on debt reduction are going.
In terms of gross government debt, data from the Australian Office of Financial Management shows it reached a record $565 billion as at 11 October 2019. At the time of the September 2013 election, gross government debt was just $273 billion.
This means that in a little over six years, with six budgets and countless policy changes and reforms from the Coalition, gross debt has increased by $292 billion or 107 per cent.
This article was written on 8 October 2019: It was on the Yahoo Finance website at this link https://au.finance.yahoo.com/news/open-letter-frydenberg-kouk-203308160.html
An open letter to Treasurer Josh Frydenberg
On a range of policy issues, we do not see eye-to-eye.
But on the big picture view of the economy, I am sure we at one that the best thing policy can achieve for the Australian economy is sustained, strong economic growth. This means a growth rate that is sufficient to give a job to everyone who wants one, where real wages are rising and where there are improvements in the well-being of every day Australians.
As I look at the economic scorecard since you have been Treasurer, I am bitterly disappointed to see that economic growth has slumped and is no better than during
I see the unemployment not only heading higher, but the level of underemployment rising to a point where one in 12 people with a job are not working the number of hours they would like.
I look at wages growth and see stagnation, and in per capita terms, the thing that best measures true economic progress, the economy is going backwards. A per capita recession, if you like.
Then I look at what is being done about this fragile state of affairs.
To its credit, the Reserve Bank is easing monetary policy but as I am sure you are aware, the cash rate is getting close to zero which could create policy concerns for the Bank if the economy remains in the doldrums. Sure, it could implement negative interest rates or embark on a program of quantitative easing, but the impact of these policies on growth and jobs is unpredictable and may be hard to unwind, even if they work.
Which brings me to the crux of my letter to you.
You are in charge of Commonwealth government spending and taxing policies which together amount to around $1 trillion per annum. Last financial year, as you recently noted, there was an unexpected narrowing of the budget deficit from the time of the May 2018 budget.
The balanced budget you delivered occurred with the Government’s tax take for 2018-19 a remarkable $11 billion higher than forecast, while government spending was over $6 billion lower than forecast.
These differences totalled nearly $18 billion, or 0.9 per cent of GDP. That’s the difference between 2018-19 GDP growth of the actual 1.9 per cent and something closer to trend at 2.8 per cent. This money was withdrawn from the economy by your government and it is a critical reason why GDP growth has collapsed so disconcertingly.
If you are fair dinkum about being a Treasurer that wants to preside over a strong economy, where there is full employment, rising real wages and improvements in individual well-being, how about using your policy powers and prowess to get a bit of extra cash into the economy?
This article was written on 17 September 2019: It was on the Yahoo Finance website at this link https://au.finance.yahoo.com/news/house-price-falls-near-end-022809313.html
House prices falls are coming to an end – and my house price bet is looking safe
About a year ago, the melodramatic Martin North from Digital Finance Analytics made the sensational claim on 60 Minutes that house prices “could fall 40 to 45 per cent” over “the next 3 years or so”.
This outlandish forecast was so reckless and irresponsible, that I offered Mr North a chance to put his money where his mouth was, offering him a bet that his forecast would be wrong. Having some ‘flesh in the game’ when making forecasts like that really focuses the mind and tests the resolve of those making headlines and scaring the general population who may actually believe such snake oil.
Surprisingly, Mr North was unwilling to take up my offer.
This was disappointing until Tony Locantro, Investment Manager with Alto Capital in Perth, stepped up to take the bet.
I was generous, offering odds of 6 to 1 that house prices would fall by more than 35.0 per cent over a 3 year period. The bet is framed on dwelling prices, measured by the Australian Bureau of Statistics on a quarterly basis in Sydney, Melbourne or for the average of the eight capital cities. If prices fall by 35.0 per cent or more from the peak levels by the time the December quarter 2021 data are released, in either Sydney, Melbourne or the average of the eight cities, I will lose.
It is as simple as that.
The ABS has just released the June quarter 2019 house price data.
This article was written on 26 August 2019: It was on the Yahoo Finance website at this link https://au.finance.yahoo.com/news/rba-cut-interest-rates-september-033400092.html
The RBA should cut interest rates next week
The board of the Reserve Bank of Australia meets next week and the smart money is betting it will not cut interest rates.
What’s more, the market is anticipating the RBA will not only hold the line this time and probably also in October, but will cut rates at the November Board meeting. This will be after what is expected to be a weak inflation result in late October and perhaps 50 basis points or more of interest rates cuts from the US Federal Reserve in coming months.
By November, the rise in the unemployment rate is likely to be further entrenched which will make the case for lower interest rates a certainty. This may well turn out to be the case, but the scenario outlined above begs a question, why should the RBA wait to give the economy a much needed boost?
No reason to hold off
In other words, why not cut interest rates next week when everyone and their dog knows the economy is currently weak, when inflation is testing record lows and the labour market is starting to deteriorate. Add to this the unfolding dislocation to global trade and economic growth, courtesy of US President Donald Trump and his irresponsible escalation of tariff wars, and there seems no sensible reason for the RBA to hold off cutting interest rates to help guard against these negative influences.
With the RBA mandate to target annual inflation at between 2 and 3 per cent in concert with full employment, if the RBA was to cut 50 basis points next week would it threaten to blow the inflation and full employment targets out of the water?
This article was written on 20 August 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/mortgage-rates-set-to-fall-to-new-recordlows-210011407.html
New record lows ahead: Your mortgage rate could be slashed further
Fancy a mortgage rate of 3 per cent? Maybe a little less?
Within the next few months, mortgage interest rates are on track to fall to fresh record lows, probably below 3 per cent.
That is the overwhelming message to come from the Reserve Bank as it struggles to deal with the soft economy where inflation is tracking at record lows, a long way from returning to the 2 to 3 per cent target range.
While the totality of these interest rate cuts are unlikely to be fully passed on to mortgage holders, strong competition within the mortgage market will see mortgage rates fall from current levels around 3.5 per cent down below 3 per cent. This is a stunningly low borrowing cost for those buying a house.
It also means that housing affordability in much of Australia will be at its best level in many decades.
How much could you save on your mortgage?
Due to a range of issues, I have been slow / unable to update my blog for some time.
Issues resolved - so I will be adding articles, ideas missed in recent weeks.
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/rba-interest-rates-government-can-stimulate-economy-but-wont-210050650.html
“Bitterly disappointing”: We are seeing a once in a generation policy failure
Imagine having the power to promote economic growth, lower the unemployment rate and set in train the conditions to boost real wages growth and inflation?
It would be immensely satisfying to change policies to improve the living standards and quality of life for every day, hard-working Australians and their families.
Next imagine a harsh reality where economic growth is weak and slowing, the unemployment rate is rising and wages growth and inflation well below a satisfactory level, and you choose not to wield the power reverse these uncomfortable circumstances?
Doing nothing, unwilling to pump some much needed cash into the economy because of a political dogma wedded to a notion that budget surpluses are good and that holding interest rates unnecessarily high so you might dampen demand for houses – which is seen as a problem - and household debt overwhelms your power to make things better.
This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/did-the-rb-as-monetary-policy-put-our-economy-at-risk-033940907.html
The RBA admits it stuffed things up – sort of
The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.
Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.
The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.
A few terms first.
According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.
In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.
This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/just-how-weak-australia-strong-economy-213520159.html
The weak economy is turning higher
In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.
Curiously, both assessments are wrong.
The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.
It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.
These are not the dynamics of a “strong” economy.
Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.