Some of the data makes us look like a nation of irresponsible risk takers. Here’s what to say next time someone tells you we’re “not saving enough.”
Aussies are a sensible bunch.
We’re a pragmatic and grounded people. We wear hats when it’s sunny. We check the oil and water in the car. We know when it’s bin night.
And we save for a rainy day.
I know this probably isn’t news to you, but that last point in particular will be a big newsflash for the property chicken-littles who reckon the property market is going to collapse in one big massive fart any day now.
One of the stories you hear – and you hear a few so its hard to know who believes what – is that Aussies are shit at saving.
And that reflects a short-sighted irresponsibility. The idea is that we took a once in a century mining boom and blew all the proceeds on booze, party poppers and property.
And so the only thing holding up property prices is our ‘live fast die young’ attitudes. As soon as there’s any sort of shock on the world stage – the whiff of something funny coming from China’s pants – Aussies will realise that they’ve been caught short.
It’s closing time and they can’t find their wallet. In desperation, we’ll all start selling our houses, and that massive selling spree will cause a total collapse in property values.
As an example, take this chart from Steve Keen. Yep, that’s the same Steve Keen who sold his Surry Hills house about 6 years too early. Up you go tiger. Can’t keep a good man down.
This chart is why Keen reckons we’re due for recession in 2017. It shows the Private Debt to GDP ratios across the world. Australia is in red.
The point he makes is that while the rest of the world de-leveraged after the GFC, Australia actually leveraged up.
Therefore, we’re due. Therefore, crash time. Therefore, sell everything.
(Steve, if you’re looking to offload more Surry Hills property, I know a few buyers.)
The problem with this story is that it assumes America etc. is “normal”, and therefore Australia is out of whack. But what if Australia’s doing all right, and the rest of the world is whacky?
You wouldn’t normally make that call, but the rest of the world has just been through recessions. Australia hasn’t.
And the point I would make is that interest rates in Australia have been falling. Now if I think about my own situation, if interest rates fall, I’m able to carry much more leverage.
So looking at the country as a whole, if interest rates are falling, I’d be expecting debt to income ratios to be rising.
Now these are complex things, and I’m no economist, but I have a mate who knows a few. And so I was interested in this modelling from American research house Lombard Street.
Foreigners usually make a meal of Aussie analysis, but these guys have a fair crack at it.
They ask themselves the question, are Australians saving enough to withstand severe financial stress?
They admit that a household debt to income ratio of 1.8x, and a savings rate that continues to fall looks like a problem on the face of it.
But then they set up a model based on net worth terms of trade (=purchasing power) to predict a historically ‘appropriate’ savings rate.
Funnily enough, they find that Aussie households have been relatively conservative, putting aside considerably more than would be justified by the surge in housing assets (which is the lion’s share of net wealth).
Looking at their chart, there’s a massive divergence. Given we’ve had a huge surge in net worth and purchasing power, you’d expect our savings rate to be a lot less.
So Aussies are ‘conservative’. We’re not all looking for kebabs at 4 a.m. Rather, we’re mostly at home and in bed by 8.30.
In their words:
“Consumers seem to have acted on the (very sensible) assumption that the exuberance which accompanied the mining boom was not permanent, and were then quick to adapt to the collapse in terms of trade – and the resultant deceleration in wages – over 2012. In other words, as the ‘supercycle baton’ was passed from iron ore to the housing market, households remained prudent despite a surge in their net worth.
Households have also been taking advantage of falling interest rates to get ahead of schedule on their mortgages, which are mainly variable-rate. They do so using ‘offset’ accounts. According to the RBA, these have been growing by some 30% a year – far outpacing mortgage credit – to exceed 6% of housing loans outstanding. So the net rate of increase in housing leverage is somewhat slower than the headline suggests.
Unlike in the early 2000s, today’s household savings behaviour reduces the likelihood of a severe house price correction. ‘Big short’-type concerns seem overblown….
…By keeping savings high it is Australian households themselves that are enabling relatively smooth navigation of the commodity supercycle…”
So Aussies are ‘prudent’.
And unlike a lot of foreign analysis, these guys understand the role of off-set accounts. (I wonder how common they are overseas…)
Anyway, the point is, on the face of it our debt-to-income ratios and our falling savings rate look alarming. A lot of people are spooked.
But when you put it in context, Aussie households are actually pretty sensible, and are still in a cautious phase – still preparing for the worst.
That is not a recipe for collapse.
As I said, Steve, if you’re selling, I’m buying.
Are the people you know cautious and prudent? Or are they throwing caution to the wind?