View Full Version : Austalia Is Shagged Too

18th January 2010, 13:43
into Debt-slavery

The Daily Reckoning Week in Review
Melbourne, Australia

January 11th to January 15th, 2010
By Dr. Alex Cowie


[Editor's note: you are receiving this version of The Daily Reckoning Week in Review as part of your subscription to The Daily Reckoning Australia.]

* Sleep walking into debt slavery
* First home buyers leave the market
* China moves to control bubbles
* Will China's move tame metal prices?
* Platinum moves into the fast lane

Sleep walking into debt-slavery

Australia now has one of the highest rates of household debt in the western world. In total, households now carry $1.2 trillion of debt, which is a staggering 112% of GDP.

Like a nation of zombies, we have sleep-walked up to ears into debt slavery.

Unfortunately it is a world where debt is the only way most will achieve property "ownership". Of course when you take on debt to buy a house, really it is the lender that achieves this property ownership. The lender becomes your landlord, and the mortgagee really just becomes the tenant.

You can stomach this in a world where property prices go up. In fact it has been so long since Australian prices did anything else that it is hard for most to even entertain them going down. Even though last year property prices fell significantly in every other major economy.

Either way does that mean it's ok for us to get up to our eyeballs in debt? $1.2 trillion dollars for a country with a population of 21 million equates to $57,000 per person.

Or to put it another way, this debt translates to an average of $141,000 for each of the nation's 8.5 million households.

Even in a world where property prices always go up, this is a huge burden on society as a whole. The average household income (net of tax) is around $85,000 a year. Using all of this money it would take about twenty months to pay off all the average household debt.

Saul Eslake, ANZ's former chief economist, made the point that the important statistic to look at is not household debt to GDP. Instead he suggests monitoring the debt to asset ratio. At a household level this would be the ratio of the mortgage value to the property value. However, this only holds true until property prices fall. With a falling property value the ratio of debt to equity can rise quickly.

Or worse still, the property can become worth less than the debt. This is negative equity, and as many US home-owners will tell you, it's not much fun. Unless you want to sell your property and make a loss, you are stuck where you are, paying interest on a loan which is worth more than your home.

The other statistic Saul Eslake pointed out was the size of the dept payment as a percentage of disposable income. Banks often lend out amounts that will require repayments equal to 30% of customer's disposable income. This represents a massive amount of someone's hard-earned, but of course banks are happy to lend it, if you are able to pay it.

When lenders sell mortgages, they are like farmers planting fields of crops. They'll come and harvest you regularly. As long as they can harvest what they want without killing off the crop, then they are happy.

Selling debt which is going to take nearly a third of someone's disposable income for coming decades drastically reduces what that person can then do. They may not be able to afford further education, or to set up a business. It siphons a great deal away from areas of potential economic growth. It is plain irresponsible. It also assumes that they are going to continue to have a job, which is still far from guaranteed.

With this sort of lending practice, it's sadly not surprising to hear that Commonwealth and its mortgage fund Colonial First State are in a spot of bother. They were caught out by a spike in lending losses, so prevented withdrawals from its $850 million mortgage fund.

Fitch ratings agencies reckon that Australian banks are in danger of more loan defaults now that interest rates are on the rise and the government unwinds economic stimulus. It also said that the stress will show in small to medium sized enterprises. This translates to bad loans accumulating on Aussie bank balance sheets.

Selling debt is big business. It's all about getting the kids hooked. A good friend of mine told me this week that he was staggered at how much the bank were prepared to lend him and his girlfriend for a home, given their modest combined income. This will be his first trip to mortgage-town, and I fear he is too blinkered by the big bucks to think about the reality of the repayments. Particularly during a time of rising interest rates.

Maybe he should start reading the Daily Reckoning.


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First home buyers leave the market

The latest ABS housing data shows that between October and November, housing approvals fell by 5.6%. This was the steepest fall in eighteen months. Despite the fall in housing approvals, the aggregate value of these mortgages rose. Property prices must have risen significantly in this short period.

The First Home Buyers fell in number as you would expect, now that the grant is on its way out, and high interest rates are on the way in. First home buyers quickly fell from 26% to 22.1% of the market.

It's worth pointing out that the grant did not make more people buy. It just brought the date of their purchase forwards. Instead of buying last December, or sometime during this year, they bought last June instead. This means there should be less action from this end of the market than there would otherwise have been this year.

And they are all in time for the rising interest rate cycle. Hopefully they are all prepared for it.

Of course, the other effect of the FHB grant was to elevate prices by the exact value of the grant, in the areas the first home buyers were buying in!

China moves to control bubbles

China has started making a few moves clearly aimed at containing the massive bubbles forming in the country. Property and stock markets have both hit fifth gear in the last year, after bank lending surged by US$1.35 trillion last year.

It's important to point out that this money comes from savings rather than borrowings as it is in the US. Still, that money is wasted if all it does is just inflate prices.

Theses bubbles were what led Jim Chanos call China "Dubai times a thousand". He is a hedge fund manager famous for making billions from shorting falling markets.

Not everyone shares his views though. Jim Rogers who runs the famous Quantum Fund with George Soros, says that Chanos is wrong; "ten years ago he couldn't even spell China, and now he's an expert?"

China's regulators have now lifted reserve requirement ratios at Chinese banks, by fifty basis points. This makes China the first country to start unwinding emergency policies deployed during the crisis. China is clearly trying to mop of the liquidity to reduce the bubbles.

We wrote last week that China was making noises about doing something. China can surprise with the speed of action though. What happens in China is essential to what happens in commodities. This is something I follow closely for Diggers and Drillers.

Will China's move tame metals prices?

Lifting the reserve requirements will put a lid on the excessive lending of last year. This put base metal prices under pressure this week, and there is a lot of discussion about what effect China's actions will have on commodity markets.

Metals prices have increased steadily for the last year or so. The question is whether prices will correct now that Chinese authorities have started tightening monetary policy.


19th January 2010, 06:52
It is correct that the level of debt and the degree of speculation on real estate are at absurd levels here. On top of it all now, however, is the Reserve Bank steadily raising interest rates to dampen the debt binge and speculation. Like closing the gate after the horse has bolted, it is way too late. The bubbles are now locked and loaded, and overdue for popping. Real estate in Melbourne appreciated 17% last year!