As part of the background to the LateLine interview yesterday, I graphed the US household debt to GDP ratio against the Australian. All the news recently has been about the sub-prime crisis in the States, of course: but guess where household debt has been growing fastest? That’s right, good old Australia has out-done itself once more. The accompanying graphic tells the story, which I’ll embellish in the next Debtwatch report in early April.
11 users responded in " Household Debt: US vs Australia "
Subscribes to this post comment rss or trackback url
aspro said,
in March 15th, 2007 at 5:30 pm
Hi Steve,
I would type a bit faster but my jaw is still hanging on the keyboard…
That is unbelievable.
There has been quite a bit of talk saying the Australian Market for Non Conforming (Subprime) loans is much smaller percentage of the total mortgage market when compared to the US.
I think it is actually alot larger than many think. Not only do all the Mainstream lenders now offer Lo doc and No Doc options… but mainstream lenders also have the ability significantly “bend the rules” to get a deal through as a fully conforming loan, especially if it is under 80% LVR and out of the sight of mortgage insurers.
I am reminded of the comments of Bluestone’s CEO (about 4 months ago in THE WEST AUSTRALIAN)… who commented that “Australia’s mortgage industry was a Bus smash waiting to happen”. From the mouth of one of Australias largest non conforming lenders!. He said that significant competition from major banks was taking place and in instances were approving loans that even Non conforming lenders were saying no to.
I think any one with borrowed money need to seriously consider what they are doing to reduce their levels of debt. This is going to get very ugly.
Keep the good work up Steve,
Kind regards,
Allan
Steve Keen said,
in March 16th, 2007 at 8:34 am
I have to agree that it’s jaw-dropping! Mine dented the keyboard too when I first generated the graph. But it’s real: the data in both instances come from the respective country’s central banks.
So our bubble has grown at, to hazard a guess, twice the rate of the USA’s over the last fifteen years. Whatever less informed commentators might want to argue about our higher quality of regulation, this phenomenon has clearly crept under their radar.
jswinstead said,
in March 16th, 2007 at 9:01 am
Steve, I would be interested in hearing your thoughts on what would be the actual result of a major crisis in the world financial system. IE how would Australian banks fare; what would be relatively safe havens; etc. Would bank bills be safe.
Steve Keen said,
in March 16th, 2007 at 9:12 am
I’ll get around to a full answer tomorrow, because today I have a court appearance and a TV interview to do. But focusing on the last half of your question, if a debt-deflation does break out then the best safe haven is long term government bonds–which rise in value if, as would happen during a crisis, interest rates are cut.
Apart from that, in one sense, all other bets are off. There is such an accumulated degree of dislocation in world financial markets now that predicting any other consequence is very difficult. Japan 1990-2005 gives the best recent historical perspective we have, but the many differences between Australia and the US’s situations and Japan’s then complicate the picture enormously.
foundation said,
in March 16th, 2007 at 9:36 am
I think Alistair Jeffery (Bluestone CEO) was saying something more to the effect that banks were inexperienced in lo-doc and should leave it to specialised lenders… such as Bluestone:
“Bluestone Mortgages, a provider of non-conforming mortgages, told the Australian that the company had been in discussions with some banks about providing arrears-management services. Bluestone chief executive Alistair Jeffery said “there is a bus smash waiting to happen in terms of the pricing of the risk that some lenders are taking on and the lack of preparedness to handle the arrears.”
http://www.mortgagemaestro.com.au/news/140/0
From yesterday:
“Alistair Jeffery, chief executive of lender Bluestone, said arrears had risen with higher interest rates, but remained “well within expectations”.
“No markets are immune to stresses such as this and we would all be deluding ourselves if we thought that Australia was a haven where these sorts of stresses can’t bite,” Mr Jeffery said.â€
http://www.theage.com.au/news/business/risky-loans-hurt-but-australia-still-better-off-than-us/2007/03/14/1173722558475.html
Here are my questions – who is going to be left naked when the tide goes out? Have the non-bank lenders packaged and sold all or just some of their loans, and to whom? What about the banks? Is my superannuation fund going to take a hit? Are the investors who purchase mortgage backed securities protected by buy-back provisions similar to those that have bankrupted so many mortgage originators in the US?
cray said,
in March 16th, 2007 at 9:49 am
I agree with aspro that the big banks have much greater exposure to credit risk than is promoted in the media.
One area that has me stumped is bank valuations. I always thought that bank val’s were more conservative than RE val’s - often by 20-30%. ‘A bank will not loan more than what they think they could sell the property for’. That can not be so anymore. If RE values are rising, bank val’s must be rising at the same rate to allow ppl to finance their homes.
That would mean that bank valuations are as inflated as all other property prices and therfore subject to possible correction - that would expose banks to more risk than their books may suggest.
I am not sure how mortgage insurance works - it may cover the bank for loss during a forced sale - but is there a limit and could banks be seen as irresponsible if they increase valuations simply to allow credit to be provided.
Any comments?
jswinstead said,
in March 16th, 2007 at 12:09 pm
Steve, your comments on what would happen in a total meltdown would be most interesting?
Steve Keen said,
in March 17th, 2007 at 1:43 pm
I will have to leave an answer to that for a future Debtwatch js; I’d like to answer, but pressures of work are making it impossible to give a detailed answer.
A half-baked one would be less than useful: not only would I leave lots of detail out, but it could be used later to build a “straw-man” version of my views. I’m experienced enough in the world of academic and political debate to know that it would be unwise of me to supply the straw.
So if you can wait 2-3 months, I’ll give a detailed answer in a Debtwatch report. My next one (April) will focus on the astounding reality–which I only just realised myself after downloading the US data–that our rate of growth of mortgage debt has been twice theirs. So much for the benefits of a superior regulatory regime…
cray said,
in March 21st, 2007 at 2:37 pm
Steve,
just read an item on itulip about the looming ARMS resetting, seems the US will be in trouble in 12 & 48 months as low rate loans are reset to the current variable rate.
Does Australia have a similar problem in the future as fixed rate and ‘honeymoon’ loan rates are cranked up to the variable after 12-36 months.
Is there any data on the number and timing of these types of products in Australia, and hence when they may come up for renewal.
This could provide a lag in the repayment of the debt bubble and cause a ‘cover up’ of the extent of loan repayment pain as current rate rises do not effect all borrowers yet but will in the future.
Chris
cray said,
in March 21st, 2007 at 3:04 pm
Answer my own question:
Just looked at the ABS data for finance by type
% of fixed loans
Nov-2001 5.1
Nov-2002 6.9
Nov-2003 15.2
Nov-2004 11.6
Nov-2005 14.7
Nov-2006 21.3
Jan-2007 20.5
So for the past 12 months 20% of all loans written have been fixed - so the rate rises have not ‘bitten home’ yet for these people.
Also of interest the fixed rate loans are larger than average by about 5% (fixed avg $232k, all average $223k).
may have some effect on the timing of the ‘crunch’.
jswinstead said,
in March 26th, 2007 at 6:01 pm
Steve,
Thanks. I will await with interest for your comments.
In such a doomsday scenario it would be nice to know where to have your money?
Julian.
Leave Your Reply Below...
Please Note: Comment Moderation Maybe Active So There is No Need To Resubmit Your Comments
Translators
Recent Comments
- prudentsaver in Has Debt-Deflation Begun?
- Bullturnedbear in Has Debt-Deflation Begun?
- carbonsink in Has Debt-Deflation Begun?
- prudentsaver in Has Debt-Deflation Begun?
- Steve Keen in Has Debt-Deflation Begun?
- Steve Keen in Has Debt-Deflation Begun?
- mv in Has Debt-Deflation Begun?
- prudentsaver in Has Debt-Deflation Begun?
- iconoclast in Always look on the bright side of …
- imbankrupt in Has Debt-Deflation Begun?
Blogroll
- 20070308: Bad debts on the rise in mortgage belt
- 20070309: Late-paid mortgages show pain in suburbs
- 20070314: LateLine on the US Sub-Prime Crisis - Video of Tom Iggulden’s report on New Century’s woes and arguments (including mine) about its relevance for Australia
- 20070314: Warning on ’silly’ loans - The Age covers the new ’shared equity loans’ being offered by Adelaide Bank and St George
- 20070317: Onward rolls the sub-prime story in the USA
- 20070725 New York Times “‘Lender Sees Mortgage Woes for ‘Good’ Risks”
- 20070725 New York Times Op Ed “‘Stopping the Subprime Crisis”
- 20070815: 7.30 Report “American mortgage shock waves hit Australia” - Profile of the Cooks case and views on the likely collapse of the mortgage market in Australia
- 20070826 New York Times: Inside the Countrywide Lending Spree - Inside the Countrywide Lending Spree
- 20070917: How bad debt infected the world - Excellent Sunday Telegraph feature on CDOs
- 7.30 Report - Many Baby Boomers will retire in debt–and I’m probably one of them!
- ABC PM on US Subprime Crisis - Stephen Long covers the USA Subprime crisis and local angles with interviews of Steve Keen, Ian Rogers (The Sheet) and David Tennant (Care ACT)
- Bear Stearns: Turmoil in sub-prime mortgages
- Beware of Exploding Mortgages (New York Times June 10 2007)
- Can the mortgage crisis swallow a town? - New York Times chilling description of the mortgage crisis’s impact on one town in Ohio
- Centre for Policy Development - The policy portal that evolved out og the New Matilda
- Credit derivatives: At the risky end of finance - The Economist on derivatives
- Debtwatch Podcast - Debtwatch’s Monthly Podcast with Stuart Cameron (www.cameronmedia.com.au)
- Debunking Economics - My Debunking Economics website. A wealth of lectures and papers, and a poverty of organisation!
- Doug Noland - Doug Noland’s Credit Bubble Bulletin: the best analysis of America’s Speculative Bubble
- First home payments hit $3000 per month
- FN Arena: Mortgage crunch in Australia too? - FN Arena covers my March Debtwatch and more optimistic (or Panglossian?) takes on the situation from Macquarie Bank, etc.
- Global House Price Crash
- House of credit cards may fall - Robert Lusetich, Los Angeles correspondent for The Australian, bemoans the nature of America
- Housing Affordability
- iTulip - One of the best commentary sites on the Internet Bubble has been reborn amid the USA’s mortgage binge
- NZ Reserve Bank on Regulation: PM May 9th 2007 - Interview on the Budget, Inflation, and New Zealand’s Reserve Bank’s shift on regulation
- Our economic managers - Non Sequitur’s brilliant take on those who think the “status quo” will last forever
- RBA 2003 Conference on Asset Prices and Monetary Policy - This is an excellent set of papers on the dangers of leveraged speculation, and the capacity of the market for irrational behaviour.
- RBA Bulletin Statistical Tables - The good people at RBA Statistics have recently added a Zipped file that contains all their XLS files–many thanks!
- RBA Speech March 16th - One economic indicator not considered in Dr Edey’s presentation was the level of private debt…
- Shared Equity Loans - Well-researched article on the pitfalls of shared equity mortgages
- The New Matilda - Intelligent alternative thought on social and economic issues in Australia
- True rate of home defaults hidden - Repossessions may be four times higher than reported figures
- Two Depressions, One Banking Collapse - An excellent comparison of the 1890 to the 1930 Depression, by Chay Fisher & Christopher Kent, which shows how much more severe the 1890 downturn was for Australia, and the role of debt and housing speculation in that crisis
- US Federal Reserve Historical Statistics - I use the Zipped “tabs” files from this page; check the bottom of the page for an explanation of the data structure
- US Housing Crash Blog