Deleveraging pulse unchanged

Westpac’s February Red Book is out and shows some interesting results following the two rate cuts. For me the most significant chart is the following:

That’s a fair drop in the appeal of straight savings but only a commensurate rise in the appeal of paying down debt. Shares and houses very much still on the nose and this despite an ongoing rise in the “time to buy a dwelling” component. This is a structural shift towards traditional savings illustrated.

The excellent Red Book is below:


Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.


  1. Ye gods. That chart has appalling range of colours.

    Can anybody help out a colour vision challenged individual such as myself?

    Am I right in thinking deposits/super is at the top, followed by repaying debt then RE with shares taking up last place for the results at Dec-11?

  2. Is it just me, but does anyone else feel that governments/central banks are going insane (spending/printing with gusto) while the general populace is switched onto reality?

    I suppose it’s the the powers that be trying to reflate things while the plebs furiously deleverage. Who wins the tug of war?

    • +1. Central banks are going to fight deflation to the death with leaves us with the very problem HH was talking about in DFM’s post.

      The fear of inflation (ie get into assets) with the reality of deflation (ie get out of assets) – great fun for those just floating on the ocean in the storm…

  3. From the comments above it is quite clear that none of the bloggers actually read the Red Book Report. That might be partly because it is quite difficult to access through the portal provided.

    Whilst I don’t discount the graph you provided as being important, I am more than a little bemused as to why some of the information such as the “Special Topic – House Price Expectations” on page 10 wasn’t covered.

    This is a site where many come to find out the current state of the housing market, and it is very important to those readers. Having a quality report such as this enhances the information available, and apart from the occasional ill informed “but they have a vested interest” comment, everyone benefits from quality information. Having a love affair with the truth may be a rough and rocky relationship at times, but it’s about the best we’ve got when the balance of your life savings hangs on important financial decisions.

    So apart from “Deleveraging”, what did this report cover?

    Well for one the special report on housing expectations had this to say:-

    “While consumers have a more positive outlook for house prices in 2012, price gains are still not the majority view. Just under half expect prices to be higher in 12mths, 30% expect no change and the rest (22.5%) expect further declines.
    That contrasts with an outright majority of optimists between Jul-09 and Apr-11 and an outright majority of pessimists in Nov-08.”

    It wasn’t uniform of course – this was the result in Qld:-

    “All states recorded a rise in house price expectations but by far the biggest gains were in the resource states. Expectations have swung 180° in Qld from price pessimists dominating in October to optimists now outnumbering pessimists by two to one in January.”

    IN WA the result was:-

    “Expectations also jumped sharply in WA, which was the only state to record an outright majority of consumers expecting house price gains in the year ahead”

    Whilst Victoria was more circumspect:-

    “Vic consumers were much more subdued on the house price outlook with one in four still expecting price declines in the year ahead”

    Not exactly bullish – but with only one in four expecting price reductions in Victoria, it is far from bearish.

    Another part of the report deals with Housing Sentiment Indicators (page 15) – of note is graph 15 “Time to Buy a Dwelling” on the same page. Those who take the time to look at the graph will note that the current setting is positive (not bearish) although I wouldn’t regard it as overtly bullish either. Note the comparisons to the recession periods in the 80’s and 90’s.

    Whilst this report is by no means bullish, it really doesn’t support the bearish “slow melt” outlook either.

    Perhaps I’m misguided, but I think that it is incumbent on sites like this to at least point to this information, so that visitors can either discuss it or at least read it and draw their own conclusions.

    I apologise for not having the facilities to post those graphs in this post, but anyone can download the pdf version from here and print out whatever they choose –

    • Some nice points there, Peter. And that’s why we post the report, so you can read it.

      I didn’t have the time to unpack the details for readers today so chose a couple of charts that represented my view of the data, which doesn’t strike me as at all unbalanced.

      I noted the rise in “the time to buy” index as a positive offset by the fact that consumers hate debt right now.

      That’s balance.

      To my mind, consumers can have the expectations about house prices all they like. But as long as nobody is willing to borrow, prices will fall.

  4. ITs not by design Peter, we are all very busy, today in particular. There’s the matter of earnings season, the Luci Ellis’ speech, and some bloggers are on holidays to boot.

    So I take what you are saying, but give us a little break this is not a full time endeavour.

    • Fair enough guys – I do understand time constraints. I didn’t think that I was particularly harsh in my comments – maybe it’s just me.

      You do need to look at the pdf portal though, whenever I go into it, it becomes unstable and very hard to read.

      I understand that a site like this needs adverts to help raise revenue, but if it’s too hard to access or read no one will bother.

      There must be a better way of providing downloads that will bring the ads to a greater audience, AND make the info more accessible to your audience.

      That’s not a criticism of the content. I have my own websites and I know how hard it is to get things right, but if they aren’t right no one goes there. It’s the nuts and bolts that hold these sites together – no matter how much you put into the commentary, it won’t work on all levels if the base isn’t right – all of the rest looks professional though – sean has done a good job on the rest of the site.

      • Peter, are you saying, based on the information presented in relation to expectations in the Westpac report that you believe property prices in QLD will increase this year?

        • El Greco Qld is a big and diverse state, so making a call that covers the whole of Qld when we have some industries in recession, but mining and support industries in a boom is a bit difficult.

          I think that prices will hold or firm slightly in SEQ in 2012, but if you are a potential buyer, I wouldn’t rush it, just watch the market and rent for now unless you can find a house that offers great value and really suits your families needs, then by all means consider your options.

      • “You do need to look at the pdf portal though, whenever I go into it, it becomes unstable and very hard to read.”

        Not for me, Peter. Maybe a browser or computer memory issue?

        Possible solution if these aren’t the reason: right click on the link above to open the report in its own window.

  5. Has anyone else read Lucy Ellis’ speech today? It covers some interesting ground though what’s not said is as interesting to me as what is said.

    When you read her comment below, bear in mind that in Australia roughly 35% of new owner-occupier mortgages are interest-only as are roughly 50% of new investment mortgages.

    “Some recent research by economists at the Federal Reserve suggests that it was not high proportions of subprime loans that predicted which districts would have worse outcomes for prices and loan defaults (Barlevy and Fisher 2010). Rather, it was the proportion of new lending that was interest-only loans.”

    • Wasted OpportunitiesMEMBER

      AB, that owner occupier interest only stat is astonishing. I must not have seen it before or I would have remembered. I notice a similar proportion of mortgages have LVRs greater than 80% – I wonder to what extent the groups overlap.

      And yet I suspect a good chunk of these mortgagees are happily ensconced in “their” property, thankful not be paying “dead” money in rent.

      Mind boggling

    • Wasted OpportunitiesMEMBER

      Just realised the “interest-only” stat includes 100% offset accounts, which is not really the same thing. Seems a strange decision to lump them together. I wonder what the break down is.

      • Yes, good pickup WO – something I should have noticed myself. I would expect that the inclusion makes the owner-occupiers figure much better but I wonder what difference it make to the investors.

    • It’s possible that those stats are not much more than an indicator that residential housing is perceived as a good tax shelter.

      An interest only loan makes fine sense for an investor with debt outstanding on the family home and i suspect that some of the ‘new’ owners are miners (typically much enamoured of any shelter they can lay their hands on) and planned ultimately to be used for this purpose. A big chunk of these buyers may have cash elsewhere.

      (this is not a comment on the financial validity of said tax shelter)

      • I’m sure that is the case but the fact remains that interest-only mortgages are risky, regardless of why they were taken out.

  6. Minus Zero-Sum Game

    The ‘Wisest Place for Savings’ time-series chart was easy to read for me. Some salient (standout) features include the short-term trough around early 2003, which was just before the start of the great 2003-2007 leverage bubble. However, interesting that the red shares line generally trended down throughout this bubble period (i.e. divergence). The red line continues to trend down to this day.

    Notice the long-term rising dark grey line trend for deposits/super. Yes, this trend represents the new paradigm where brokers and fund managers are largely superfluous to the general public.

    As for deleveraging, this matches my investment style. Every week I put 75% of my net income into higher interest online savings. After doing this for several years, coupled with compounding interest and no fees, the results are more impressive than I ever had with trading/investing shares.

    • Were you reinvesting your capital gains and dividends??

      ie. is it a like for like comparison?

      I’m not saying anything either way – just wondering if you really compared apples with apples…

      • Minus Zero-Sum Game

        Yes, capital gains and dividends were auto re-invested. This is a sensible strategy for most. Moreover, I didn’t need the investment income because I was already living off ~ 25% of work income. These were primarily ASX top 20 blue chip shares via a fund manager (CFS).

        However, it was the occasional large capital losses that really put my equity curve behind. These losses really interfer with the compounding process – it can put you behind a year within weeks. The macro international scene was coming up with jack-in-the-box news events which gradually dragged down my equity curve. As broker Marcus Padley wrote this week: “This is a time of flux. When the market is priced on risk and risk can change exponentially in a moment, Greece going bankrupt for instance, you can’t realistically set investment horizons in advance.”

        The capital losses were the main cause of equity drawdown, but fund manager fees, and buy/sell spreads also contributed. I come from a background trading lower volatility shares, so a stop loss was acted upon when necessary. However, with too many stop losses being hit, you also lose ~ 0.8% each time on buy-sell spreads.

        While this was all going on a friend mentioned that it wasn’t really necessary for me to take on risk given that I was saving so much every week. His point was that most traders can’t save fairly large amounts of cash every week, hence they have no choice but to trade. I understood his point and realised that in order for me to obtain a ~ 6% return typically on cash type investments (Internet savings, term deposits, etc), my fund would need to earn ~ 9.6% return from the market before fees were taken out (9.6% minus 2% management fees minus 1.6% buy-sell spreads. When did the ASX20 last average 9.6% over a ten year period?

        Say someone invests $100,000 in an Aust share fund. If the fund returns say 6% net of fees anually, that would be considered a good return in the current environment. A 12% annual return would be about as good as one could expect. However, rather than wait around and see what Wallstreet decides what our market will do, why not show a bit of initiative and by earning extra and/or cutting costs, add an extra $120 per week (not an excessive amount by today’s standards). That way you get the 12% return by default, regardless what the share market does. When saving every week as much as I do, the return is much higher than 12%.

        • …2% management fees minus 1.6% buy-sell spreads…

          You’re quite right, it’s a joke that folks go for this stuff. How on earth are you supposed to get ahead with some manager stealing *more than half* your profits (based on a long term 7% pa real return on stocks, which is quite optimistic, but perhaps not wildly so).

          There may be something to what the fellow on this blog advocate – actively managing your own investments. I think that’s very hard to assess for the average person.

          But as far as mutual funds go the evidence seems to me to be quite overwhelming. The only ones that are going to do right by you are the really low-cost index funds. And realistically you need to be able to commit for a minimum of 10-15 years before they start looking safe. And 20+ would be better.