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    Exploding the living-beyond-our-means myth
    By Alan Kohler
    December 1, 2004

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    Hands up all those living beyond their means. No hands? Know anyone who is? Still no hands.

    But the country as a whole is going backwards, apparently, so more than half the population, you would think, must be living off garage sales and ever-growing credit cards. Some people might be, but most? No way.

    Foreclosures and mortgagee sales are low and, despite some pursed lips around the Reserve Bank of Australia and the Australian Prudential Regulation Authority about lending practices (or, rather, loan flogging practices), there is no sign of any increase in bad and doubtful debts.

    Retail sales are soft, but that seems to be due more to high petrol prices than the national debt burden. Property values have fallen by 15 per cent in some places, but no one cares. There is a delirious sharemarket boom. Unemployment and interest rates are low; household wealth is at record levels.

    In short, the idea that the country is living beyond its means is a myth.

    The current account deficit is 6 per cent of gross domestic product (GDP) because there is an extraordinary investment boom going on. As HSBC chief economist John Edwards points out, investment is a record 25 per cent of GDP, domestic savings are steady at 19 per cent and the difference (6 per cent) comes from offshore. Edwards says Australia's investment boom is almost as big as China's (proportionately) - the greatest in 40 years, and it's why we have a high current account deficit despite very good terms of trade.

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    AdvertisementIs it bad? Depends what it's being spent on. It's mostly business investment on infrastructure, a lot of it in energy and minerals to supply China. About a quarter of it is residential construction - renovations as an alternative to moving house because of high stamp duty and new houses for all the immigrants.

    Economist Shane Oliver estimates average Australian net wealth is now eight times disposable income - the highest in the world.On the whole, it's all good, and so is the current account deficit.

    True, debt is high. National foreign debt is now above $400 billion, 80 per cent of which is owed by Australia's banks, backed by mortgages and either insured or well covered by assets.

    The average mortgage is $60,000, or 150 per cent of average net income, but this is meaningless without any reference to household assets or interest payments.

    According to data from Treasury and the ABS, Australian wealth has now hit $5 trillion, which is $250,000 per capita or more than twice that per household.

    AMP economist Shane Oliver estimates that average Australian net wealth is now eight times disposable income - the highest in the world (yes, Australia is apparently now the world's richest country). According to the latest figures, the same figure for the US is 5.5 times, Britain 7 times, Japan 7.5 times, France 6 times and Germany 7 times.

    Average interest as a percentage of disposable income is up to a record 9 per cent, but that takes no account of tax: 45 per cent of last year's housing loans were for investment property, the interest on which is deductible against income, including rent.

    Yesterday AMP and the research house Natsem put out their ninth Wealth and Income Report, for which they mine the so-called HILDA - Household Income and Labour Dynamics in Australia - survey data funded by the Department of Family and Community Services.

    The main paragraph in their press release, though, actually came from the most recent ABS National Accounts: "... the average Australian household spends 2.3 per cent more each week than income coming in."

    But do they? It's true that the national accounts show a negative savings rate of 2.3 per cent, but that counts a notional (non-cash) figure for depreciation of buildings as a part of household expenditure. This figure has been soaring with residential property values.

    It might seem reasonable to count depreciation as expenditure - even though values have been rising, not falling - because houses have to be renovated and painted every few years. Maybe that depreciation can be seen as simply an amortisation of the occasional renovation. Except that the money actually spent on maintaining houses is also counted as expenditure at the time it is spent. It means the negative national savings rate includes a big bit of double counting. It's meaningless.

    So is there a problem at all? Not at the moment, but there might be later.

    Australian households do have a lot of debt, which is why they prefer political stability to taking a risk on a new ALP leader.

    It might also be one reason for declining trade union membership: being in a union means occasionally going on strike, but with a big mortgage, the stakes for individual workers in a dispute are much higher.

    It also means the stakes are high in the economy generally. Two small rate rises last year produced a 10 to 15 per cent fall in property values and marked drop off in real estate activity.

    Australia cannot afford to have a recession. Fifteen years ago the RBA, Treasury and the Government deliberately brought on the "recession we had to have" to correct the current account deficit. Now they must do whatever it takes to avoid one. This time around, rates will be cut, and fast, at the first sign of trouble.
 
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