Mum and dad investors have Australia teetering on the edge of a housing crash, report warns

If you say so.

Where have I told you what you can and can't comment on. I was simply giving you some context on my comments since you completely misinterpreted them.

Because net household debt is not about offsetting "household assets" against "household debts", as has been explained multiple times.

That's misrepresentating my comments again.



See, for example, your comment in another thread:

The doom and gloom brigade are aggressive, persistent and annoying. I stand by that comment in the context it was made.

The equation is net household debt.

It is interesting enough for RBA to publish a bulletin on it:

https://www.rba.gov.au/publications/bulletin/2016/sep/3.html

Really, I don't know why you are getting so aggro. I asked a question that I genuinely don't know the answer to, which you took for some reason to mean something completely different. When I explained what I meant by the question you launch into another attack.

You admit you have used pseudo-sarcastic bluster as a tactic. Why not just discuss?

 

You claimed to answer but you didn't really. We are just going round in circles, rehashing the same ground over and over, achieving nothing.

I'm not quoting your comments again where you didn't answer the question. There is no point.

 

That's funny. I meant I cut it from YOUR quote. Now you feel attacked again, and mention "aggro". I give up. Keep confusing your offset account with "net household debt".

 

That's ok I'll quote it for you:

I can't help it if you don't like the answer provided.

 

"From Lending and Deposit Rates to Household Cash Flow
Household disposable income, or cash flow, comprises wages and salaries, property income (including interest paid on deposits) and transfers, less taxes and interest payments on debt. The household sector in Australia holds more interest-bearing debt than interest earning assets (Graph 1). Indeed, households have increased their debt holdings at a rapid pace since the early 1990s, mainly due to an increase in mortgage debt. For the household sector as a whole, the level of household debt now exceeds the level of directly held interest-earning deposits by a significant margin. However, since the mid 2000s, slower growth in household debt and increases in interest-earning deposit balances (including balances held in mortgage offset accounts) has led to a decline in net interest-bearing debt.[3] This means that the household sector is a net payer of interest. Household net interest payments increased through the 1990s and early 2000s, mainly reflecting the rise in net household debt, but trended down from 2007 as interest rates and net debt declined (Graph 2)."​

https://www.rba.gov.au/publications/bulletin/2016/sep/3.html

 

Abbott & Costello Who's On First - YouTube

 

Did you forget what you posted?

Doesn't really line up with your claim above now, does it?

 

Should be a lot of fun as Rates Rise.

 

Why the market doesn't care about liar loans

Definition of net debt used in the article:
Our net debt – loans minus cash and other financial assets not including equities or superannuation

Clarification of other financial assets in the article:
Our holdings of financial assets and real estate have risen considerably faster than our debt.

In Financial crisis debt remains constant, but the assets will be in a free fall. Net debt will do nothing to arrest the deflation of the asset price, because as per the source definition itself, net debt is a function of the asset price, it will simply escalate arithmetically with the fall in asset prices.

On the other hand there is nothing to suggest that the asset price is a function of the net debt.

Simple cause and effect. A cart cannot pull the horse, but I am sure there will be suggestions to the contrary.

 

The context of the article https://www.rba.gov.au/publications/bulletin/2016/sep/3.html from which graph is being misrepresented is important too:
..............................................................begin quote...........................................

Title: The Household Cash Flow Channel of Monetary Policy
Conclusion:
This article finds evidence for both the borrower and lender cash flow channels, but the borrower channel is estimated to be the stronger channel of monetary transmission. One reason for this is that while there are roughly similar shares of borrower and lender households in the Australian economy, the average borrower holds two to three times as much net debt as the average lender holds in net liquid assets. Another reason is that the sensitivity of spending to changes in interest-sensitive cash flow is estimated to be larger for borrowers than for lenders based on statistical analysis using household-level data.


Overall, the estimates suggest that the cash flow channel is an important channel of monetary transmission; the central estimates indicate that lowering the cash rate by 100 basis points is associated with an increase in aggregate household income of around 0.9 per cent, which would, in turn, increase household expenditure by about 0.1 to 0.2 per cent through the cash flow channel.
..............................................................end quote...........................................

There is nothing in the article (title to conclusion) to suggest that net-debt will prevent a recession. Net debt is just a parameter to justify, how lowering the cash rate will increase household expenditure.
If anything it (bold) confirms what has already been picked up by the astute posters regarding distribution of debt and assets among households.

 

Bingo!

 

I read these article definitions to be an alternative way of defining what the CBA/ABS/RBA graph in the article shows. ie. Financial Assets = Currency and Deposits. Both definitions seem to exclude equities, super and real estate.

 

No, haven't forgotten what I posted, just can't find a "personal attack" in it. Polemical critique yes, personal attack no. Stones and glass houses spring to mind...

 

1. The exclusions as in the paper itself, are limited to superannuation (just below the graph) "The data shown above do not account for interest-earning assets held in managed superannuation accounts, which have increased substantially since the early 1990s."
2. Another way to look at it is - what the graph is representing: % of annual household disposal income (before deduction of interest payments) towards net debt. In the context of a household, this value cannot be calculated by ignoring the real estate / mortgage as the housing assets comprise 58% of assets and housing debt is 66% of total debt (Table 1 same paper).

 

Net debt is shown on this graph:



Net debt is defined in the article as "loans minus cash and other financial assets not including equities or superannuation"

The question then is real estate included in "other financial assets". i.e. is real estate a financial asset or a non-financial asset?

DVA defines financial assets as (among other things):

• all accounts with banks or other financial institutions (including savings and cheque accounts and term deposits);
• cash in excess of $500;
• gold and other bullion;
• managed investments such as public unit trusts (including cash, mortgage, property and equity trusts), insurance bonds and friendly society bonds;

And non-financial assets as (among other things):

• real estate investments

Factsheet IS89 - Deeming and Financial Assets | Department of Veterans' Affairs

This makes sense because if you look back at the liar loan article, it is clear that "Australia's total housing mortgage book is worth $1.6 trillion out of housing valued at some $6 trillion".

So, if housing loans are worth $1.6 trillion and housing is worth $6 trillion, then if net household debt included real estate, it would be negative. Think of it another way. If $1.6 trillion is 180% of annual household disposable income, what percentage of annual household disposable income would $6 trillion be?

The graph is similar to a graph from an RBA Bulletin entitled The Household Cash Flow Channel of Monetary Policy.

Here is the description of Graph 1 above:

Household disposable income, or cash flow, comprises wages and salaries, property income (including interest paid on deposits) and transfers, less taxes and interest payments on debt. The household sector in Australia holds more interest-bearing debt than interest earning assets (Graph 1).​

In the graph, you can see the labels:

"Debt", "Directly held deposits" and "Net debt".

There is nothing to indicate that real estate is considered to be part of "Directly held deposits" either in the graph or the description of the graph, which uses the term "interest earning assets".

https://www.rba.gov.au/publications/bulletin/2016/sep/3.html

An examination of the raw numbers: cash and deposits vs real estate holdings vs debt, it will quickly become apparent that Net Household Debt does not include real estate holdings.

There was an article that is a good source of raw numbers:

"Thursday's figures from the Australian Bureau of Statistics showed households' net worth, after taking into account all their liabilities, rose 3.6 per cent to $9.4 trillion in the three months to December."​

"Mortgage debt in the country stands at $1.7 trillion, yet that is equal to just 26.7 per cent of the value of homes and land, suggesting home prices would have to fall a long way to put the average owner into the red."​

"Australians have also been squirrelling away a pile of liquid assets. Cash and deposits alone topped $1 trillion last quarter for the first time on record, having more than doubled over the preceding decade."​

Household net worth: $9.4 trillion
Housing ~ $6 trillion (from above)
Mortgage debt: $1.7 trillion
Cash and deposits: $1 trillion

If you compare the value of housing vs mortgage debt, that doesn't look the right ratio to fit the graph.

If you compare Mortgage debt to cash and deposits, that will be roughly the ratio to match the graph.

Australians sitting on mountains of cash as wealth outpaces debt

Putting real estate assets into the household equation would give Net Worth.

Net worth is defined as:

Non-financial assets including:
o Land and dwellings
o Other non-financial assets

+ Financial assets
- Liabilities

= Net Worth

5232.0 - Australian National Accounts: Finance and Wealth, Jun 2017

Net worth includes real estate holdings
Net debt does not include real estate holdings

Net Debt is Household debt (loans, credit cards etc) minus the value of Financial Assets (cash and deposits). I am not sure how the value of cash and deposits falls in price during a financial crisis.

In a financial crisis, it is likely that non-financial asset prices (such as real estate) values will fall and I agree that net debt will not prevent that. However, I don't agree that Net Debt is a function of the asset price. Net worth is a function of the asset price and Net worth will decline in line with the value of the declines in the price of non-financial assets.

It is noted that stable Net Debt will not prevent a fall in the price of non-financial assets (such as real estate)

I hope this clarifies.

EDIT: the graph I linked to is not identical to the graph in the RBA paper. Post updated to reflect this.

 

From the paper:

Total interest-bearing debt is $128,000. $128,000 represents ~160% of household disposable income.

Housing assets is $530,000. $530,000 represents ~663% of household disposable income?

The ? is because I am not sure how to calculate that

Total interest-earning liquid assets is $53,000. $53,000 represents ~75% of household disposable income.

It's clear to me that Net Household Debt is Total interest-bearing debt - Total interest-earning liquid assets.

You may be reading it another way.

 

"A polemic is contentious rhetoric that is intended to support a specific position by aggressive claims and undermining of the opposing position."​

Polemic - Wikipedia

 

I agree and I have not stated anywhere that net-debt will prevent a recession.

 

Then the discussion or for that matter net-debt is pointless, because it is ineffectual for containing any financial downturn.

 

I'm glad we finally came to that conclusion.