Okay, I am dead if private debt (majority from household mortgages) in Australia does not undermine her external stability. Most of this debt is from private financial institutions, they obviously borrow from foreign savings because Australia just doesn't have the capacity to have enough money supply for such huge amounts of debt. So it indirectly leads to Net foreign debt.
Well the problem in your line of thinking is that when you look at external stability, you arent concerned with debt held domestically. Mortgages are primarily funded by domestic savings. There are some banks (particularly margin lenders) who will borrow some money from overseas as it is cheaper, but regular mortgages are financed domestically with our overseas financial flows being investments etc. Secondly, a house is an income generating asset. For example, if you live in a house you need to pay rent. If you happen to own the house you live in; you just happen to be paying rent to yourself. This rental income should cover the interest repayments (afterall if it didn't it wouldn't be a wise investment). Subsequently for the same reason that a business borrowing money from overseas to invest in new mining infrastructure isn't considered a problem; borrowing to buy a house is also considered a safe investment. Therefore private debt again is not considered to be a real concern so long as it is being used for productive purposes. This being said, this is not to say that private sector debt by nature is safe. It could be bad if it is used to finance a large trade deficit. But in Australia, it isn't which is why governments arent too concerned about private sector debt.
SUMMARY:
The article basically says Australia is going to get into a recession in the next 2 years because of the unsustainable level of debt, particuarly in house mortgages. It is kind of like the US subprime meltdown, but its Australia's version.
So if this doesn't relate to external stability...then what does it relate to?! Even if it doesn't Im supposed to argue that it does undermine Australia's external stability. Its due on next week and I've spent quite some time on it, I can't change at the end.
Please help, thx
I think you have completely missed the point. The article has nothing to do with external stability. External stability is concerned with external financial inflows and outflows. Private sector debt is just to do with borrowing.
This also has nothing to do with the sub-prime mortgage crisis. That was a US specific problem because of the incentive structure in their credit market. For example mortgage brokers had an incentive to issue a loan, but then these loans were securitised and sold as riskless investments when of course they werent because the incentives were for the mortgage brokers to issue as many loans as possible irrespective of the mortgagee's capacity to repay the loan.
This problem highlighted here is one which describes a situation where Australians are over-geared. Traditionally whilst we would take out a mortgage to buy a property, the value of that property would have been a much lower amount. The properties that people are buying now are more expensive and the average home price has grown faster than our incomes. We have come off a period of low interest rates and many of these people overgeared themselves as the servicing costs were not that high. But now that interest rates are going up, servicing costs are becoming unsustainably high. They are increasing as a portion of our income, therefore consumption has to fall.
This arguement has nothing to do with external stability.
WannaBang? said:
Private debt is absolutely fine. It's the public debt that we should be worried about. When private organisations apply for loans, they are screened through risk-assessment tests, and if they are seen as risky and possibly unable to repay debt, they are most likely to be knocked back. Governments on the other hand can get loans without a risk assessment and therefore have a higher risk of defaulting.
Assuming that governments are crappy managers of money and investments (which they usually are) ; governments wont default, they will just have to repay interest using other methods other than the income generated by the asset that they have purchased with the loan (i.e. taxes).
tau281290 said:
But the article says private debt is the real issue. Considering the amounts the private sector has borrowed from banks, then banks borrow from overseas. Once property growth slows against the level of borrowing, Australian households would not be able to repay their debt. And this is the main cause of the next recession - as the economic professor said.
And I think public debt nowadays is negligible considering how many privatisations happening since the Howard government.
The government has zero net debt.
Through the future fund, the government actually contributes to national savings.
bling05 said:
Nobody is right or wrong. There are a number of people who say the large foreign debt and therefore the large CAD are very risky and undermine our external stability such as the bloke mentioned in the article, and then there are people who oppose him such as Pitchford, who says that the CAD and the large foreign debt is OK because it is all private debt - 'consenting adults'
Well, some people are wrong...
And its those who believe that we shouldn't have a CAD without looking at the composition of that debt. So categorically you can say that private sector debt is ok so long as it is being used productively.
tau281290 said:
Just edit it before you post it
Most of household mortgage debt is from private financial institutions, they obviously borrow from foreign savings because Australia just doesn't have the capacity to have enough money supply for such huge amounts of debt. So it indirectly leads to Net foreign debt.
I think you are overstating this. The mortgage market is a low yield investment for intitutional investors. Subsequently the majority of our mortgages are underwritten domestically as a low risk investment for the banks and superannuation funds. Financial institutions do borrow money from oveseas in order to fill the gap between our domestic savings and profitable investment opportunities but these arent used for mortgage funds.
