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Australian households are facing a collective reduction of $ 700 billion in their wealth due to the need to reduce the considerable debt accumulated during the real estate boom.
Key points:
- Australian households face $ 700 billion in wealth loss due to lower house prices and debt reduction, Morgan Stanley says
- Overall, Australia has the highest, or near, levels of household debt in most
- The pressure of household debt should lead to a fall in the dollar in the years to come
In a survey of global economies, Morgan Stanley, the gigantic US investment bank, found that the Australian economy posed the greatest risk by reducing household debt.
"Australia appears to be the most exposed, combining strong household and external leverage, poor housing conditions in the domestic market and future adjustments in macro-prudential and structural / fiscal policy to come. ", concluded Morgan Stanley.
The plight of Australia is compounded by the need to reduce debt incurred during a period of falling real estate prices and at a time when the household savings rate represents a tiny percentage 1% of disposable income.
"The most worrisome concern about the potential impact of a deleveraging phase for Australian households is the narrowness of the current savings reserve," said Morgan Stanley.
"From the point of view of wealth effects, our expected decline in real home prices of 10 to 15%, combined with a 20% debt / asset ratio, would result in a significantly reduced net worth.
"If the map represents the value of all land / property owned by households, that would amount to a $ 700 billion devaluation of wealth."
Morgan Stanley's 68-page detailed report combines three key measures of household debt – debt / income, debt / assets, and debt service ratio – to create a broad, broad-based risk indicator.
Alarmingly, Australia is at the top, or almost all, of the three measures.
"Our household debt risk indicator suggests that Australia is the economy most threatened by household deleveraging, standing at almost the top of all three dimensions.
"Leverage and debt service are high and rank second among external sources of financing, while falling real estate prices and credit growth are slowing the risk of deleveraging." more imminent. "
| Country |
Level of indebtedness (Percentage of income) |
indebtedness (Percentage of assets) |
Debt service ratio (percentage of income) |
|---|---|---|---|
| Australia | 189pc | 20pc | 16pc |
| WE | 101pc | 19pc | 8pc |
| Eurozone | 95pc | 20pc | 5pc |
| United Kingdom | 125pc | 14pc | 9pc |
| Japan | 72pc | 17pc | 7pc |
| NZ | 156pc | 18pc | 14pc |
| Canada | 165pc | 16pc | 13pc |
| Swiss | 195pc | 19pc | 10pc |
| Norway | 224pc | 38PC | 15pc |
| Sweden | 176pc | 30pc | 11pc |
Source: BIS, Haver, Morgan Stanley.
Overall household debt at a "turning point"
The Morgan Stanley report argues that global economies have reached a "turning point" in the household debt cycle, with the average household debt-to-GDP ratio falling from 54% to 87% over the last decade.
This trend has been fueled by low interest rates financing real estate booms in most developed economies.
"Debt actually increases current growth at the expense of future growth," noted Morgan Stanley.
"Today's debt, which strengthens investment and home consumption, will require savings tomorrow, thereby reducing consumption and inflows into the housing market."
While some economies have seen a decline in the debt-to-income ratio of households over the last decade – notably the United States, the Eurozone, and the United Kingdom – others – including Australia, Canada, New Zealand and the Scandinavian countries – continued to borrow heavily.
Central banks and financial regulators have focused on financial stability using so-called macroprudential tools to limit risky loans.
In Australia, this has led to restrictions on interest-only loans and the likely imposition of tighter lending limits following the Royal Bank Commission.
In addition, there remains an important question about the future of negative gearing and the deductibility of lost rents if the Labor Party wins the federal election next year.
Risks rise, Australian dollar down
Morgan Stanley said the Australian economy had held up well, with GDP growth above 3% and unemployment down slightly to 5%, but this is unlikely to continue.
"The risks are increasing, since the consumer has supported consumption by tapping into his savings rate, which has fallen to 1%, while the residential construction cycle is at its peak and that it will weigh on the record number of jobs in the construction sector "warned.
"Credit remains limited and ongoing overbuilding is leading to weak prospects.
"We now see an increase of 10 to 15% [house price] correction, against 5 to 10% previously, which would make the deepest fall in the real price of housing since the early 80s.
"The strength of the global economy and support for public infrastructure spending mitigate these hurdles, but the risk of a longer / deeper recession than usual remains high if these conditions change."
The high level of household debt and the priority given to financial stability by the Reserve Bank probably mean that any rise in official rates should be gradual.
While rising RBA rates could push up the Australian dollar, Morgan Stanley believes the effect will fade.
The Australian dollar is already becoming the weakest lever of Morgan Stanley's spreadsheet – the investment bank has said it will only weaken over the next few years.
Topics:
economic trends,
housing industry,
motto,
monetary and monetary policy,
business-economics-and-finance
Australia
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