1

I hear that Australia has the highest household debt to disposable income ratio in the world.

What does that mean? What implication does that have for the economy, for the stock market and for the housing market?

  • To be a bit autistic: are you actually asking "what does this mean" ie "what is the meaning of this statement" or just "what are the consequences?" – poolie Dec 20 '10 at 13:25
  • both, but yeah mainly what are the consequences – Joe.E Dec 20 '10 at 21:45
2

Stock market

Tends to follow the DJIA and FTSE, so unlikely to see an Australia-only crash, especially while resources are doing so well. If China's growth slows before other ailing sectors improve, a downturn becomes more likely and the potential severity of the downturn increases.

Economy

A huge question to which I would refer you to Steve Keen: http://www.debtdeflation.com/blogs/ See A Fork in the Road.

Housing Market

It's a bubble, stupid! Seriously, it's as though the Aussies waited for the US to get done and then simply borrowed the copy book. There are a multitude of articles out there about likely outcomes from where the housing market is and where it's going. See this for a sample of what's out there: http://blogs.forbes.com/greatspeculations/2010/07/26/aussie-housing-bubble-gets-popped-with-chinese-credit-crash/

Note: All three of the areas you raise - economy, stock mkt, housing - are so intertwined that it's tricky separating them out. A lot of reading on Steve Keen's site can help.

2

I'd like to see a credible source for "the highest", but it's certainly fairly high.

Household debt could be broadly categorized as debt for housing and debt for consumption.

Housing prices seem very high compared to equivalent rental income. This is generating a great deal of debt. Keynes(?) said that "if something cannot go on forever, it will stop." Just when it will stop, and whether it will stop suddenly or gradually is a matter of great interest. Obviously there are huge vested interests, including the large fraction of the population who already own property and do not wish to see it fall. Nobody really knows; my guess would be on a very-long-term plateau in nominal prices and decline in real prices.

The Australian stock market is unlike the US: since it's a small country, a lot of the big companies are export-driven, either by directly exporting physical goods (miners, agriculture) or by FDI (property trusts, banks). So a local recession will hurt the stock market, but not across the board. A decline in the value of the Australian dollar would be very good news for some of these companies.

Debt for consumption I think is the smaller fraction. Arguably it's driven by a wealth effect of Australia having had a reasonably good crisis with low unemployment and increasing international purchasing power. If this tops out, you'd expect to see reduced earnings for consumer discretionary companies.

-1

It is basically the same situation what US was when the crash happened. People took on debt without the means to pay, even with awful credit records. But the problem isn't the debt people take on themselves, but with the limited disposable income they have how efficiently can their debts be serviced. And how do banks who lend out money can recover their money. When banks lend money to all and sundry, they have to take care of defaults and that is when financial wizardry comes into play. In US people have the option to default on their debt and refinance it, so banks assumed default and tried to hedge their risks. If this is an option in Australia, be ready for a crash else not to worry about much. If banks continue lending expect higher inflation rates, higher interest rates and maybe a downgrade of bonds issued by the Australian government. Higher import costs and a boom in exports because of devalued Australian dollar.

  • Uh, citation needed? The lending business, regulatory and legal environment is quite different. I haven't seen any credible reports that liar loans exist to nearly the same degree, and there is no Australia jurisdiction where the lender's recourse is capped at the value of the property. – poolie Dec 20 '10 at 13:16
  • @poolie - I described the US scenario and mentioned that if the option of defaulting and refinancing on your loan is allowed in Australia, then you can expect a crash in the near future. And citation for what ? – DumbCoder Dec 20 '10 at 14:02
  • I'd like to see more than just as assertion that it is basically the same situation what US was when the crash happened. People took on debt without the means to pay, even with awful credit records. From what I've read, people with awful records are generally not getting credit in Australia, and banks are not lending to all and sundry. If you have better sources by all means post links. – poolie Dec 20 '10 at 14:04
  • Yes, if the option of defaulting and refinancing on your loan is allowed in Australia, then you can expect a crash in the near future. But that option generally isn't allowed in Australia, so...? If Australia was north of Minnesota we'd call it Canada. – poolie Dec 20 '10 at 14:05
  • @poolie - It is basically the same situation -> means high debt scenario, low disposable income to repay back the loans and it ends here. The situtation then propagates with riders i.e refinancing and defaulting and loans to people with bad credit records. So unless and until all factors merge there is a very very low probability of US type crash. – DumbCoder Dec 20 '10 at 14:23

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