Household Debt, Housing Prices, and Resilience

David Murray, the head of Australia’s financial system inquiry, talks about RBA Governor Phillip Lowe’s warning on house prices


Household Debt, Housing Prices, and Resilience


Ross: I told you at the beginning of the program about that warning from Philip Lowe, the Reserve Bank governor, who was saying that household debt right now is making Australia’s economy less resilient to future shocks. Now, it’s pretty obvious, if you simply go to the Reserve Bank anywhere you need to, Australian Bureau of Statistics and have a look at household finances.

Look at the percent of household disposable income that that makes up. Go back to around 1990 and debt made up around 60% of household disposable income. Well, it’s almost tripled since that time. Right now, it’s sitting at more than 180% of household income. It has been the fastest rising household debt in the world. Now, that’s largely because, not only have lending products been made available, but also because Australian households have been prepared to put themselves in the debt to buy real estate.

But then against that, if you go from around 2008 onwards interest rates have fallen dramatically. The amount of interest households are paying right now because of those falling interest rates is comparison with the overall household income. It’s fallen from around 15% of household income, back in the mid-2000s to around 9% today. In other words, Australian households appear from an income point of view, to be better off.

Now, a man who built this cap first off was on this program, that man is David Murray. Not only the head of government’s financial system inquiry, but also the former chief executive of the Commonwealth Bank. He, going back almost three years, said it household debt that was a fundamental risk inside Australia’s economy. He’s on the line right now. Many thanks for your time, David.

Interview with David Murray, former CEO, Commonwealth Bank

David Murray: Thanks, Ross. How you doing?

Ross: Very well, thank you. I mean this could not be spelled out any more clearly by the Reserve Bank governor, could it?

David: I think he’s done a fabulous job at it because he’s looked at the data. He’s given a calm, clear assessment of how things work. He’s talked about some moderating indicators that are there. But the way the Reserve Bank needs to look at this little shadow over the economy on potential contraction of consumption and what needs to happen to fix it.

Ross: In other words, if we have a goldy locks economy, in other words if the employment stays strong and the interest rates remain relatively low, then Australian households can probably absorb and basically cope with this debt. The problem is if either of those things break at any stage, that unemployment rises, that interest rates rise, that’s a time when households start to suffer serious stress.

David: That’s exactly right. That’s his concern. He’s more concerned about the effect on the economy itself, rather than trying to suggest that there has to be a downward spiral in house prices.

Ross: One of the reasons why you and I started talking about this was because of the rise in government debt, because governments could not balance their books, and as a result, the deficits keep racking up. Therefore, the government debts keep racking up. I just spotted the other day, the gross debt right now, the amount of bonds the government, the federal government has on issue, is close on $500 billion, net debt lower of course.

But the point is that as a result of that, it is not necessarily that per se the government debts are high in global terms. But it’s the government debt, when added with the household debt, that really does start to become more alarming from a national point of view.

David: That’s right because if the government can’t maintain its credit rating, then the bank’s credit ratings suffer. The banks have to adjust their interest rate to the time when household indebtedness is mostly high. We have a higher risk here than we had. I think the governor’s concern here is that if loan growth per housing continues to grow above wage’s growth, then that’s an indicator of more potential stress on households.

It also means that we need more than ever for the normal adjustment factors in the economy to come through, which the Reserve Bank despite their efforts has been unable to engineer because they’re outside their control. What I’m really talking about is an adjustment of the currency. We have less room to move, the federal government has less room to move.

Currency adjustments have been harder to engineer in the past because of games that are played by other countries on monetary easing and what’s effectively called currency wars. For these reasons, we’re more exposed. We got less in our toolkit.

Next Interest Rate Movement

Ross: Right now, the Reserve Bank doesn’t appear likely to cut interest rates. If anything, the bias is more now becoming to raise interest rates. What you’re saying is that even though the currency has come down from its very high peaks during the mining boom, the truth is many people expect the currency to be even lower as one of the stabilizers to help generate growth in the economy. That’s what Australia needs right now, is economic growth, which would heal many of the issues going on inside households, but also the business community.

David: We need growth in investment. That would change a lot. Lower corporate tax rates is one way of achieving that. But we’ve got to come out of that mining investment boom into some other growth in investment by business in the economy to stabilize employment, even improve employment and make households a bit more concerning about their level of consumption.

Ross: Just one final question for you, David. Is there something already then that the authorities right now are trying to cool down the housing market, given the fact that’s the place where the contribution is going, that’s where the investment is going and really, that’s where the households are feeling pretty good about things as house prices rise?

David: Yes. Look, there’s a degree of risk there that can really hurt later. It would be better now if there was a stability in home loans financing, a moderation of home prices and activity on infrastructure that will boost activity and make it easier for households to go about their day-to-day work. We need those things to happen but we got less leaders to move now. I really think that unless the currency adjusts, it will get harder and harder.

Ross: David Murray, the head of Australia’s financial system inquiry, former boss of the Commonwealth Bank. Always great with his time here on the program. David, we appreciate it this evening.

David: Thank you. Thank you, Ross.

Ross: Really interesting stuff David Murray there. I’ll tell you what, you do well to heed that sort of thing. Because there is certainly some sort of a shock coming, somewhere. You don’t quite know where it will be. Maybe it’s the currency, maybe it’s house prices, maybe certainly it’s all about that household debt.

Angus Grigg, AFR China correspondent

Anyway, speaking of shocks, there’s certainly shocks for Crown. Now, Crown Resorts in China are right now looking at its staff members who have been detained my Chinese authorities. But it seems at least two of the staff have been released according to reports by Angus Grigg who was with the Australian financial review, based in China. The AFR China correspondent, soon to come back here to run the whole thing. He’s on the line right now. Many thanks for your time, Angus.

Angus Grigg: Yes. Good evening, Ross.

Ross: Can you just explain this report that’s come out late today from you? Really, it was intriguing because not much is heard of the fate of these employees over the past six months or so.

Angus: Yes, that’s right. Seven months after these guys were initially detained up here in China, we’re starting to slowly get a bit of trickle of information over the last couple of days. I guess we’ve got a few little morsels out of some sources up here. The most interesting I guess is that we actually now know that there’s 19 staff who were detained initially up here. Sorry, 19 current and former staff were detained initially up here in China.

Three of those we now know have been released on bail. Two of those are former Crown staff members. That’s interesting in the sense that we now know that this investigation probably has been a long-running investigation. If they’re looking, trawling back through former staff members who might have worked for Crown maybe as long as a year or even 18 months prior to the arrests, then we get a real sense that this was not a snap decision to detain these staff, these former staff members as well last October. That, this is a long running operation. It was a well-planned operation. It wasn’t a sort of reaction to something that might have happened in this couple of days prior to those detentions.

Ross: When is it likely that these employers who do include Crown’s head of casinos international VIP business, Jason O’Conner, when is it likely that they will actually front a court or that their fate will be determined?

Angus: That was the other little morsel we got out of some people up here this week. That is that it is moved from a stage where the police were investigating the case to now what they call up here the procurator. We’d call it a prosecutor, where that’s they’re now looking at the case. Now, lawyers up here tell us that that will usually go for about three months. Where the prosecutor will look at the case, see where they want to push and things like that.

Now, we should mention that they can send it back to the police at any time for further investigation but that seems unlikely, which would mean we have three months with the prosecutor then it goes on to the court and then they would set a date. Things seem to be finally staring to move up here and we might even see a court date perhaps by the end of the year.

Ross: It’s going to be by the end of the year. They still would have been in there for the best part of 15 months by that time . What sort of sentence might they ultimately receive pending the types of charges that they might be hit with?

Angus: Well, that’s right. The other really crucial thing that came out this week was that it appears that the matter will be heard by a district level rather than a city level court. That’s very significant because that is a lower court here in Shanghai, and it looks like Crown has been successful in having the charges contained to gambling related crimes.

This is a vague term that the Chinese use. Now, if that’s the case there, the people who are being detained up here are facing probably no more than three years jail, but more likely they will probably get time serve which will be around 15 to 18 months which is what happened to the South Koreans who were first detained in 2015 up here. That is a really big break, a big win for Crown if that indeed remains the case.

Ross: Angus Grigg is the financial reviews China correspondent based in Shanghai where many of those employees are being detained. Angus, we appreciate your time here on the program this evening.

Angus: Thanks very much.

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