Why are we so worried about household debt?

Thu, 07 Nov 2019  |  

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.

Australian householders’ balance sheet ‘staggeringly healthy’

In the chart below, the blue line is household debt, the green line are household financial assets and the pink line is household wealth in dwelling ownership. The orange line, which is net household wealth, is the pink line plus the green line minus the blue line.

[Note – please click on the link above to see the chart]

Quite obviously, the balance sheet of Australian householders is staggeringly healthy.

In fact, net wealth is only fractionally below the record high registered in 2017 having dipped from that record in the recent past as house prices fell.

Twenty years ago, when household debt was under 100 per cent of household disposable income, net household wealth was just 500 per cent of income.

The worrywarts on household debt seemingly frame their miserable, scare-mongering analysis on the fact that householders may be stressed if there is a sharp rise in interest rates or if the value of financial assets cascades or if there is some other disaster. And to be sure, these risks are there, but they are largely present regardless of the level of household debt. 

Nothing to see here

Indeed, the last time there was a genuine problem with household debt and bank bad debts kicked higher, was in the early 1990s recession when household debt was approximately 75 per cent of income.

The level of household debt was plainly not that problem.

Household wealth in Australia is high and continues to trend higher, swamping the growth in household debt. There is a considerable buffer against a market downturn, like the recent dip in house prices or earlier bouts of weakness in stock markets, which had a negative impact on financial assets. This is not to say the household sector is immune from periodic bouts of weakness. Indeed, the current growth slump is due in large store to sluggishness in household consumption which has been triggered by record low wages growth and a weak labour market.

But don’t forget to remember, the next time you hear a doom merchant highlight high household debt as a problem for the economy, look at the level of assets and make up your own mind whether the problem is real or a gross exaggeration.


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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.