House­hold Debt: US vs Aus­tralia

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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.

House­hold Debt to GDP, USA & Aus­tralia

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • 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,

  • 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

    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.

  • 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

    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.”

    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.”

    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

    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

    Steve, your com­ments on what would hap­pen in a total melt­down would be most inter­est­ing?

  • 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

    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.


  • cray

    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

    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?