Another Perspective On Debt

We had significant reaction to yesterday’s post on the “normal” status of high household debt. So today we take the argument further using data from the RBA Household Balance Sheet series (E1) and the recent ABS data on income growth.

The traditional argument trotted out is that household wealth is greater than ever, this despite low income growth and rising debt. But of course wealth is significantly linked to home prices, which in turn is linked to debt, so this is a circular argument. You get a different perspective by looking at some additional trends.

But lets start with the asset side of the ledger. We have base-lined the data series from 1999. Since then, superannuation has grown by 181.2%, and at the fastest rate. But it is arguably the least accessible asset class.

Residential property values rose 160.2% over the same period, and grew significantly faster than equities which achieved 135.8% growth, no wonder people want to invest in property – the capital returns have been significantly more robust. Deposit savings grew 159.1% (but the savings ratio has been declining recently). Overall household net worth rose 151.2%. So the story about households being more affluent can be supported on this view of the data. But it is myopic.

The chart below tracks overall household debt, house prices, household net worth, income growth and the growth in the number of residential properties.

Overall household debt rose 161.9%, a growth rate which is higher than residential property values, at 160.2% and above overall household net worth at 151.2%.

But look at the growth in income, which is 60.5%, under half the asset growth. OK, interest rates are lower now, but this increase in leverage is phenomenal – and explains the “debt is normal” findings from our focus groups. I accept debt is not equally spread across the population, but there are significant pockets of high borrowing, as can be seen from our mortgage stress analysis – and its not just among battling urban fringe mortgage holders.

Finally, it is worth noting the growth in the number of residential properties rose by just 29.8% over the same period. So the average value of individual properties have increased significantly. On paper.

To me this highlights we have learned nothing from the GFC, our appetite for debt, supported by the low interest rate monetary policy, significant tax breaks, and salted by population growth has created a debt monster, which has the capacity to consume many if interest rates were to rise towards more normal levels. Unlike Governments, household debt has to be repaid, eventually.

This data series shows clearly the relationship between more debt and home prices, they feed of each other, and this explains why the banks have enjoyed such strong balance sheet growth. But the impact on households is profound, and long term.

Our current attitude to debt will be destructive eventually.

Employment Remains A Mixed Picture

The ABS reported their monthly employment data today, showing that trend full-time employment increased for the 10th straight month in July 2017 but both the trend unemployment rate in Australia was steady at 5.6 per cent in July 2017, and the labour force participation rate remained at 65.0 per cent.

Let’s be clear 5.6% hardly a great result as The New Daily highlights, bearing in mind the unemployment rate in the US, is 4.3%, 4.5% in the UK, 3.9% in Germany and 2.8% in Japan.  Note also that wages are depressed in these countries too. We should not get deflected by the rising number of jobs, which is where the Government would like us to look.  We should be doing better. This does not reflect “full employment”.

Full-time employment grew by a further 29,000 persons, while part-time employment decreased by 3,000 persons, underpinning a total increase in employment of 26,000 persons. The trend monthly hours worked increased by 5.2 million hours (0.3 per cent) to 1,696.4 million hours in July 2017.

Over the past year, trend employment increased by 259,000 persons (or 2.2 per cent), which is above the average year-on-year growth over the past 20 years (1.9 per cent).

The rate of employment growth (2.2 per cent) was greater than the growth in the population aged 15 years and over (1.6 per cent), which was reflected in an increase in the employment to population ratio (which is a measure of how employed the population is). This ratio increased by 0.4 percentage points since July 2016, up to 61.4 per cent, the highest it has been since April 2013.

“Full-time employment has now increased by around 220,000 persons since September 2016, and makes up the majority of the 250,000 person increase in employment over the period,” Chief Economist for the ABS, Bruce Hockman, said.

Over the past year the three states and territories with the strongest growth in employment were Tasmania (4.0 per cent), Victoria (3.1 per cent) and Queensland (2.7 per cent).

Trend series smooth the more volatile seasonally adjusted estimates and provide the best measure of the underlying behaviour of the labour market.

The seasonally adjusted number of persons employed increased by 28,000 in July 2017. The seasonally adjusted unemployment rate was 5.6 per cent and the labour force participation rate was 65.1 per cent.

Is This Amount of Debt “Normal”?

As part of our household survey we had the chance to discuss household debt in our focus group. We had selected participants with large debt burdens, because we wanted to understand better what was driving this behaviour. It was mixed group, with households represented between 20 and 60 years, from multiple locations.  The RBA data showing high household debt prompted the research.

In the session, a number of themes emerged. Yes we got the story about incomes not rising, costs going up and big mortgages; as expected. But there was another theme that struck home to the facilitators.

It is this. Around two thirds of the households in the session had a basic assumption that high debt levels were normal. They had often accumulated debts through their education, when they bought a house, and running credit cards. Even more interestingly, their concern from a cash flow perspective was about servicing the debts, not repaying them.

One quote which struck home was “once I am dead, my debts are cancelled”, I just keep borrowing til then.

Wow! Debt, it seems has become part of the furniture, and will remain a spectre at the feast throughout their lifetime.  The banks will be happy!

But this got me thinking about the implications of this observation. If households are making debt decisions based on just debt servicing, what does that say about their future cash flow in a low income growth, potentially rising interest rate environment? Is this normal behaviour now?  Has financial literacy failed, or is there a new logic in town?

If there is, then I have to ask – am I out of kilter in believing that debt can be useful, but it should be paid down as soon as possible, and that borrowing is the exception, not the rule.  Or is the new normal to be saddled with high debt, and live with it? For ever?

The remaining one third, by the way, were more conscious of the need to repay, and were surprised by the majority view in the room.

No wonder households are more highly in debt than ever as the recent RBA data shows. But what I am getting at are the cultural norms which now exist. As a result, lenders will continue to have a field day, but what are the true economic and social costs of this phenomenon?

We hope to do more research on this. Watch this space.

Income Growth Stagnant

The latest data from the ABS shows that income growth remains in the doldrums, putting more pressure on households who are experiencing rising costs (including mortgages), as our Household Finance Confidence Index shows. Given where inflation sits (1.9% on the official figures, but understated we think), many continue to go backwards. This also kills the Treasury budget assumptions. We do not see any reversal of this trend, despite recent positive business lending.

The seasonally adjusted Wage Price Index (WPI) rose 0.5 per cent in June quarter 2017 and 1.9 per cent over the year, according to figures released today by the Australian Bureau of Statistics (ABS).

The WPI, seasonally adjusted, has recorded quarterly wages growth in the range of 0.4 to 0.6 per cent for the last 12 quarters (from September quarter 2014).

ABS Chief Economist Bruce Hockman noted: “Low wages growth continued in the June quarter 2017, with annual wages growth continuing to hover around 2 per cent. This low wages growth reflects, in part, ongoing spare capacity in the labour market. Underemployment, in particular, is an indicator of labour market spare capacity and a key contributor to ongoing low wages growth.”

The annual trend is clear to see. Public servants are doing a little better than the private sector.

Seasonally adjusted, private sector wages rose 1.8 per cent and public sector wages grew 2.4 per cent through the year to June quarter 2017.

In original terms, through the year wage growth to the June quarter 2017 ranged from 1.1 per cent for the Mining industry to 2.6 per cent for Health care and social assistance industries.

Western Australia recorded the lowest through the year wage growth of 1.4 per cent and South Australia and Northern Territory the highest of 2.1 per cent.





China’s Growth Sustainable Says IMF

The results from the 2017 Article IV consultation with China have been published. The IMF acknowledged that China’s continued strong growth has provided critical support to global demand and they commended the authorities’ ongoing progress in re-balancing the Chinese economy toward services and consumption.

They noted that economic activity had recently firmed and saw this as an opportunity for the authorities to accelerate needed reforms and focus more on the quality and sustainability of growth. They supported the importance of reducing national savings to help prevent domestic and external imbalances and emphasized the need for greater social spending and making the tax system more progressive. Stronger domestic demand helped further reduce China’s external imbalance, though it remains moderately stronger compared to the level consistent with medium-term fundamentals

Amid strong growth, the authorities have pivoted toward tightening measures, reflecting a greater focus on containing financial sector risks.

Debt is now expected to continue to grow as the IMF now assumes that the authorities will broadly maintain current levels of public investment over the medium term and not substantially consolidate the “augmented” deficit, reaching 92 percent of GDP in 2022 on a rising path. Private sector credit is projected to continue increasing over the medium term. Thus, total non-financial sector debt reached about 235 percent of GDP in 2016 and is projected to rise further to over 290 percent of GDP by 2022.

They say downside risks around the baseline have increased. A key consequence of the new baseline is that it envisions China using up valuable fiscal space to support a growth path with slower rebalancing and a higher probability of a sharp adjustment. Thus, if a sharp adjustment were to materialize, China would have lower buffers with which to respond. Such a potential adjustment could be triggered by several risks, including:

  • Funding. A funding shock could come from at least two (related) pressure points. The first is the mostly short-term, “interbank” wholesale market (which includes banks’ claims on each other and on NBFIs). The second is a loss of confidence in short-term asset management products issued by NBFIs, or a run on the WMPs which fund them.
  • Retreat from Cross-Border Integration. Should higher trade barriers be imposed by trading partners, the impact would depend on their coverage and magnitude, how exchange rates respond, and whether China retaliates. For example, an illustrative simulation in the IMF’s Global Integrated Monetary and Fiscal Model suggests that if the U.S. puts a 10-percent tariff on Chinese exports and China allowed its real exchange rate to adjust, real GDP in China would fall by about 1 percentage point in the first year. If China retaliated with similar tariffs on U.S. imports, its GDP would contract further. However, given the complexity of global trade relationships and uncertainty regarding how  exchange rates would adjust, the effect could be larger and more disruptive.
  • Capital Outflows. Pressure on the exchange rate could resume because of a faster-than-expected normalization of U.S. interest rates, much weaker growth in China, or some other shock to confidence. In an extreme scenario, the pressure could lead to renewed large reserve loss and eventually a potential disruptive exchange rate depreciation. However, this risk is likely small in the short run due to the stronger enforcement of CFMs, the prominence of state-owned banks in the foreign exchange market, and ample foreign exchange reserves.

While agreeing on the growth outlook, the authorities disagreed about the associated risks. The authorities agreed that 2017 growth was likely to exceed marginally the 6.5 percent full year target. This implied some deceleration during the course of the year and would result in inflationary pressure remaining contained and a broadly unchanged current account. For the medium term, though the authorities shared the view that their 2020 target of doubling 2010 real GDP would likely be reached, they viewed the debt build-up thus far as manageable and likely to slow further as their reforms take effect. They also explained that their “projected growth targets” were anticipatory and not binding. They underscored that reaching the desired quality of growth was a greater priority than the quantity of growth. The authorities viewed domestic concerns, such as high financial sector leverage, as manageable considering ongoing reforms and Chinese-specific strengths, such as high domestic savings. They saw the external environment as facing many uncertainties, such as an unexpected fall in global demand or a retreat from globalization.

The IMF conclude that:

China continues to transition to a more sustainable growth path and reforms have advanced across a wide domain. Growth slowed to 6.7 percent in 2016 and is projected to remain robust at 6.7 percent this year owing to the momentum from last year’s policy support, strengthening external demand, and progress in domestic reforms. Inflation rose to 2 percent in 2016 and is expected to remain stable at 2 percent in 2017. Important supervisory and regulatory action is being taken against financial sector risks, and corporate debt is growing more slowly, reflecting restructuring initiatives and overcapacity reduction.

Fiscal policy remained expansionary and credit growth remained strong in 2016. Growth momentum will likely decline over the course of the year reflecting recent regulatory measures which have tightened financial conditions and contributed to a declining credit impulse.

The current account surplus fell to 1.7 percent of GDP in 2016, driven by a sharp recovery in goods imports and continued strength in tourism outflows. It is projected to further narrow to 1.4 percent of GDP this year, due primarily to robust domestic demand and a deterioration in terms of trade. Capital outflows have moderated amid tighter enforcement of capital flow management measures and more stable exchange rate expectations. After depreciating 5 percent in real effective terms in 2016, the renminbi has depreciated some 2¾ percent since then and remains broadly in line with fundamentals.

The hollow promise of construction-led jobs and growth

From The Conversation.

Any downturn in the construction industry could trigger job losses to a range of sectors that support the building industry, such as planning, project management, real estate and property services. This threat reveals the risk of relying on building and construction to sustain the economy.

Since before the global financial crisis, urban economies across the world have relied increasingly on the construction of housing, especially high rise urban apartments, to maintain economic activity.

Construction has boomed in Australia, especially in Melbourne and Sydney. Migration from overseas and interstate, as well as international student numbers, have so far maintained sufficient demand for city apartments and suburban houses to keep the building boom going.

Nationally the number of jobs in construction has increased from 927,000 in May 2007 to 1,110,400 in May 2017, an increase of 183,400 jobs. Even now, the federal government expects that construction employment will increase by 10.9% in the five years to 2022.

But this view is at odds with new data. A recent report by advisory firm BIS Oxford predicts that new dwellings construction will fall by 31%, from 230,000 to 160,000 dwellings in Australia, in the next three years. This prediction foreshadows a dramatic decline in construction employment.

The other jobs construction creates

Construction activity creates employment across the economy. There are jobs in industries that provide input building materials – such as local quarries and forests, sawmills, concrete products manufacturers, steel makers and glass, plastic and metal products manufacturers. There are also jobs created for people working in import firms bringing in materials that might not be made locally, as well as for people who work to store materials and transport them from ports and factories to building sites. Construction generates jobs for people involved in the design and planning of buildings, also those involved in the financing and contracting of construction projects.

Once the buildings exist, construction creates more jobs in marketing the properties, building inspections, buyers agents, mortgage brokers, real estate agents and the like. After the sale, more jobs are sustained in interior designer, selling furnishings and fittings and appliances, and providing internet connections and utilities.

The wages earned and taxes paid by these workers then create jobs in other services industries. This includes everything from dentists and personal trainers to bank tellers and public servants. New populations create new demand for supermarkets and schools and hospitals that employ more people.

The secondary circuit of capital

Following the ideas of French urban theorist Henri Lefebvre, geographer David Harvey famously explained a process called the “second circuit of capital” where building replaces manufacturing as the driver of growth. This secondary circuit soaks up the excess capital sloshing around the world that can’t be invested profitably in the primary circuit of (manufacturing) production. Buildings are built for the purpose of generating profits for developers and investors.

In places like Melbourne, the secondary circuit has created so many jobs in construction and related industries, that these have become the key drivers of growth. All these jobs are at risk when construction activity stalls.

David Harvey’s crucial insight was that once economies rely on construction to drive employment, then the entire economy becomes like a giant Ponzi scheme. The only way that employment in a host city can be maintained is to keep building more buildings.

Harvey argues the principle purpose of building is to generate profit, which means that the building will stop if there are insufficient numbers of buyers, or insufficient buyers willing to pay a price that will generate profit.

If the developers can elect to build elsewhere, in places where returns are higher, the local construction-led system can collapse like a house of cards. The resulting crisis would not be confined to the construction sector but would resonate through all the activities contributing to building or benefiting from the taxes and charges generated by building.

That pretty much means everybody. Once the cards fall over, not only do employment opportunities decline, but so do property values, as prices adjust to the new reality.

Some economists recommend creating new infrastructure projects to provide work, to keep the construction sector and material suppliers in business. But they rarely consider the second order effects as the downturn in construction filters through the economy. Most economists would argue that dealing with these secondary effects is best left to market forces.

This means that as the downturn filters through the economy, jobs will be lost quietly across a range of sectors. The sectors most obviously vulnerable in the event of a downturn in residential building activity will be those that rely on discretionary building-related spending – such as furniture and effects retailing, wholesaling and manufacturing. The impacts on affected households will be no less devastating than for direct building jobs.

Author: Sally Weller, Visiting Fellow, Australian Catholic University

Business Lending Stirs

The ABS data on lending finance released today for Jun 2017, provides the last piece of the lending jigsaw puzzle. Here is the overall picture, in one chart.

The key take outs are that proportion of lending for housing is falling, whilst the proportion for business lending is rising. The share of lending for investment property fell slightly.

The total value of owner occupied housing commitments excluding alterations and additions rose 0.5% in trend terms.

The trend series for the value of total personal finance commitments fell 1.8%. Fixed lending commitments fell 2.6% and revolving credit commitments fell 0.5%.

The trend series for the value of total commercial finance commitments rose 1.8%. Fixed lending commitments rose 1.8% and revolving credit commitments rose 1.8%. This includes lending for investment housing purposes. We separate that out in the chart.

The month on month movements, depicted below, show a rise in business lending unrelated to housing by 3%, whist lending for investment housing fell 0.85% month on month. So, perhaps, finally, we see lending by business beginning to gain momentum! This is needed for sustainable growth. The yellow triangles show the % change (reading the scale on the right), whilst the value is shown by the blue bars (reading the sale on the left).

The bulk of lending for investment housing still came from NSW, then VIC, where the markets are still hot.

There were a number of revisions to earlier months data, which the ABS said was a result of improved reporting of survey and administrative data. These revisions have affected the following series:

  • Commercial Finance for the periods between March 2017 to May 2017.
  • Personal Finance for the periods between March 2017 to May 2017.
  • Investment housing finance for the month of April 2017

Aging Japan Puts a Strain on the Financial System

From The IMFBlog.

Japan’s population is shrinking and getting older, posing challenges to the nation’s financial system. How Japan copes could guide other advanced economies in Asia and Europe that are grappling with the same trends but are at an earlier phase of similar demographic developments.

A declining and aging population weighs on growth and interest rates. This puts pressure on profits of banks and insurance companies. Judging how these shifts affect financial firms was part of the IMF’s Financial Sector Assessment Program for Japan, the world’s third-largest economy. The program is a comprehensive and in-depth assessment of a country’s financial sector. It analyzes the resilience of the financial sector, the quality of the regulatory and supervisory framework, and the capacity to manage and resolve financial crises.

An aging population is also likely to reduce the role of banks in the financial system. With increasing longevity, the demand for longer-term securities rises (since people save more for longer retirements). This results in a flatter yield curve–and banks typically make money by borrowing at low short-term rates and lending at higher longer-term ones. In line with this intuition, analyses of data from 34 countries around the world confirm that the size of the banking sector relative to nonbank financial intermediaries is negatively associated with aging. About 40 percent of the increase in the size of market finance in Japan since 1990 can be explained by aging.

Smaller banks that rely on lending to local markets are particularly vulnerable, since they face less demand from households and firms. Older households still need banking services for transaction purposes, which means that lending will likely fall much faster than deposits. As a result, over the next two decades some regional banks could see their loan-to-deposit ratios fall by 40 percentage points.

In response to profitability problems, banks are also engaging in riskier forms of lending and investment as they search for yield. They have been making more real estate loans, helping to drive up housing prices in some areas despite overall population shrinkage. Condominium prices appear to be moderately overvalued in Tokyo, Osaka, and several outer regions. Banks have also been investing more in securities in countries where economic growth is faster than Japan’s.

Life insurance companies are also facing increasing pressure. They have been putting more money into riskier overseas markets to get the yield needed to meet interest guarantees.

The problem is that many banks and insurers still need to develop the capacity to manage the risks associated with these new types of investments.

Consequently, stress tests suggest that market risks are increasing and that there are some vulnerabilities among regional and shinkin (cooperative) banks and life insurers. Although bank liquidity is generally ample, some of the regional banks are exposed to risks in foreign-currency funding.

The Bank of Japan has had to adapt its monetary policy to low “natural” rates in the economy and sought to stimulate demand by monetary easing. In this context, it had to resort to large-scale asset purchases. These purchases in turn, have put a strain on markets. The level of liquidity—how easily and quickly investors can buy and sell securities—in Japanese government bond markets seems to have been adversely affected by the central bank’s purchases. Moreover, the resilience of government bond market liquidity also seems to have declined as the share of Bank of Japan holdings has increased.

Japan’s financial system has so far remained stable. But there are steps policymakers can take to ensure that it remains sound as society ages and slow growth continues:

  • Supervisors need to modernize supervision to keep pace with the more sophisticated activities emerging across banks, insurers, and securities firms. Tailoring capital requirements to individual bank risk profiles and implementing a framework that appropriately recognizes the financial conditions of insurers would be key.
  • Corporate governance needs to be strengthened across the banking and insurance sectors to manage new risk taking.
  • The macroprudential framework could be further strengthened to better identify and address any buildup of systemic risks.
  • Some (in particular regional) banks will feel increased pressure, so they should be encouraged to take timely action in response to viability concerns.
  • Regional banks should be encouraged to consider augmenting fee-based income, reducing costs, and consolidating.
  • Sustaining productivity growth is a particular challenge as the population ages, and new, innovative firms can play an important role. Constraints to financial access for small and medium enterprises and start-ups should be eased by further promoting risk-based lending. Alternative forms of financing for these young businesses should be further encouraged.

These long-term challenges for business models of many banks, combined with the existence of large systemic institutions, highlight the need for a strong crisis management and resolution framework.

Will We Have Our Own Version Of The GFC?

Ten years ago this week, the first hints of risks in US mortgage portfolios emerged. French bank BNP Paribas wrote a warning of the risks in the US securitised mortgage system. Later, UK lender Northern Rock saw customers queuing to get their money from the bank, a reminder of what happens when confidence fails.  Later still, Lehmann Brothers crashed. In the ensuing mayhem, as banks fell from grace and were either left to die, or were bailed out – mostly with public funds – and as mortgage arrears rocketed away in many northern hemisphere centres, the die was cast. In the subsequent period, growth has been sluggish, central government have cut their benchmark rates, and households have seen their incomes squashed, whilst asset prices have risen to amazing levels. Regulators responded with measures to force banks to hold more capital, but we are not out of the woods yet.

Australia, it seems dodged the bullet, either thanks to luck or good judgement, so we never directly experienced the full impact. But, on the 10th anniversary, its worth reflecting on whether our version of the GFC is still to come.

In 2009,the RBA’s then Head of Financial Stability Department,  Luci Ellis gave a speech ” The Global Financial Crisis: Causes, Consequences and Countermeasures“. It is, in my view well worth reading in hindsight.

She makes the point that low policy rates in the early 2000’s allowed a flood of mortgages to to be written, lending standards to fall, (helped by the securisation of loans) and leverage to rise, significantly.

But in 2005, the Fed started to lift rates.

But you can’t borrow your way to a good time forever, and this recent example of a credit-fuelled boom was no exception. The first signs of trouble were in the US mortgage market. Lending standards had eased so far – and outright fraud had gotten to be such a problem – that arrears rates started to rise more than lenders and investors expected. The rise started in around 2006 for both prime and sub-prime mortgages, but became more obvious through 2007. The extraordinary thing was that, unlike in every other housing bust, arrears rates increased significantly before the labour market started to weaken.

Banks had enjoyed a bumper period of growth, as an article in the balance highlights. That created an asset bubble, and a building boom.  (Any of this sound familiar?)

Banks, hit hard by the the 2001 recession, welcomed the new derivative products.  In December 2001, Federal Reserve Chairman Alan Greenspan lowered the fed funds rate to 1.75 percent. The Fed lowered it again in November 2002 to 1.24 percent.

That also lowered interest rates on adjustable-rate mortgages. The payments were cheaper because their interest rates were based on short-term Treasury bill yields, which are based on the fed funds rate. But that lowered banks’ incomes, which are based on loan interest rates.

Many homeowners who couldn’t afford conventional mortgages were delighted to be approved for these interest-only loans. As a result, the percent of subprime mortgages doubled, from 10 percent to 20 percent, of all mortgages between 2001 and 2006.  By 2007, it had grown into a $1.3 trillion industry. The creation of mortgage-backed securities and the secondary market ended the 2001 recession. (Source: Mara Der Hovanesian and Matthew Goldstein, “The Mortgage Mess Spreads,” BusinessWeek, March 7, 2007.)

It also created an asset bubble in real estate in 2005. The demand for mortgages drove up demand for housing, which homebuilders tried to meet. With such cheap loans, many people bought homes as investments to sell as prices kept rising.

Many of those with adjustable-rate loans didn’t realize the rates would reset in three to five years. In 2004, the Fed started raising rates. By the end of the year, the fed funds rate was 2.25 percent. By the end of 2005, it was 4.25 percent. By June 2006, the rate was 5.25 percent. Homeowners were hit with payments they couldn’t afford. For more, see Past Fed Funds Rate.

Housing prices started falling after they reached a peak in October 2005. By July 2007, they were down 4 percent. That was enough to prevent mortgage-holders from selling homes they could no longer make payments on. The Fed’s rate increase couldn’t have come at a worse time for these new homeowners. The housing market bubble turned to a bust. That created the banking crisis in 2007, which spread to Wall Street in 2008.

Now consider Australia. We have very high household debt, high home prices, flat income, rising living costs and ultra low, but rising mortgage rates. We also have a construction boom, with a large supply of new (speculative) property, and banks that have around 60% of their assets in residential property. Arguably lending standards are still too lose despite recent tightening (which note, had to be imposed on the lenders by the regulators!).

So, consider this illustrative chart. I plotted the Fed benchmark rate – you can clearly see the run-up to 2008/9 when the GFC hit, from low levels in 2003-2004.  It took 3-4 years and a 4% uplift to lead to the crash.

Then I look the RBA cash rate and placed the current low rate in 2003. Do we face a series of rises ahead – the RBA says the neutral setting is 2% higher than current rates?  If rates do rise, then mortgage rates will surely follow, and given the majority of households are on variable rates, pain will follow too. 25% of owner occupied borrowers are having cash flow problems already – at current low rates.

So it seems to me the conditions are set for our own version of the GFC, and the bear-traps have already been laid by too high lending, high asset prices, and large debts in an ultra-low rate environment.

Of course banks hold more capital, of course the regulators are more aware, but is that enough? Judging by recent home price rises and continued lending growth such that household debt has never been higher, it may not be.

ANZ Job Advertisements continue to trend up

ANZ Job Advertisements continue to trend up, rising 1.5% m/m in July in seasonally adjusted terms. Total job ads are now up 6.5% since the beginning of the year. Annual growth picked up from 10.5% in June to 12.8% this month.

In trend terms Job Advertisements were up 1.0% m/m in July following a 1.3% rise in the previous month. The trend growth rate has averaged 1.1% m/m over the first seven months of the year, compared to 0.3% m/m over the same period a year ago.

ANZ said:

“Recent data has shown a clear improvement in labour market conditions consistent with elevated business conditions, profitability and capacity utilisation.particular, the strength in full-time employment and a solid increase in hours worked (near 3.3% y/y) are quite encouraging. Among other things we think this strength has contributed to the lift in consumer
confidence from its recent low point in April.

That said, several challenges remain and we expect the pace of improvement to moderate over the medium term. First, the level of underutilisation remains high and business surveys suggest
that it is likely to fall only gradually. Second, the drivers of growth over the next few years look to be less labour intensive given the slowdown in housing construction and the expected
contribution of labour-lite LNG exports to growth. We also don’t expect the recent strong pace of public sector jobs growth to continue. Lastly, despite the improvement in labour conditions,
wage growth is sluggish and is expected to remain so.

Broadly, forward indicators and survey based measures point towards near-term jobs growth in the order of 15-20k per month. Given the importance of the labour market and wage growth to the course of monetary policy, we will be closely watching the Q2 Wage Price Index number, out on August 16.”