Kouk goes all-in for household debt

From The Kouk:

Much is being made of the record level of household debt in Australia.  The media is full of stories screaming about the risks of debt for the economy.

Debt is high, for sure, but for anyone who undertakes sober and factual analysis of the household debt issue and judges the overall financial position of the household sector and not just debt, there is little to be worried about.

It is vitally important to realise that households do not take on that debt and throw the cash away. On the contrary.

Debt is used to buy assets which includes things like housing, commercial property and shares. For the bulk of the population with little or no debt, they are coincidently squirrelling away their savings and are accumulating wealth.

…While it can and never will happen, this fact indicates that householders could ‘cash out’ their financial assets, pay off all their debt and still be left with a couple of trillion dollars or around 225 per cent of household disposable income in left over cash.

That is a sound start to analysing the household sector’s balance sheet and puts the kybosh on the ‘debt disaster’ we hear so much about.

Now let’s look at another part of the household sector’s balance sheet, assets in housing. The total value of housing in Australia is hovering around $7 trillion – yes trillion – which is over 500 per cent of disposable income. In the mid 1990s, this ratio was under 300 per cent. This wealth accumulation in housing has been phenomenal.

It means, quite simply, that while the household debt to income ratio has risen by around 125 percentage points over 25 years, assets in housing alone have risen around 225 per cent of household income.

When all household assets are tallied, they total just under 1,000 per cent of annual income, which looked at another way, is a multiple of 10.

This means that the net level of household wealth (total assets minus total liabilities) is currently just under 800 per cent of income. It has never been higher. Net assets have risen from around 450 per cent of income in the mid 1990s.

Or another way, for every $1 of debt that the house sectors has, they have $5 of assets, which is a loan to value ratio of 20 per cent.

Given peace has broken out between Kouk and MB I will be nice.

Household debt presents two obvious problems. The first is that it weighs on consumption decisions because folks are so busy worrying about paying it back and that leads to lackluster demand. Australia? Tick.

The second problem is that the debt is not evenly distributed. Indeed, as UBS has done such a good job of explaining in its various consumer surveys, it is very unevenly distributed, and those on the margin are both numerous and at risk of failure. Australia? Tick.

Debt busts like those we have seen oversees do not come from the centre of sensible borrowers. They come from the margins where leverage is extreme. If those margins are big enough then a shock will destabilise them and, in so doing, knock a big, fat hole in the banking system. From there it is all academic as the banks pull in lending and distress begins to mushroom through the economy towards its centre as, poof, all that housing equity evaporates.

Are those margins big enough in Australia? Tick. $500bn in “liar loans” qualifies:

One of the key areas of focus of the 2017 UBS Evidence Lab Australian Mortgages survey was to assess the level of factual accuracy in mortgagor’s applications. While there has been anecdotal evidence for many years that customers are not always accurate in their application, we were lacking hard evidence. As a result the UBS Evidence Lab asked participants who had recently taken out a mortgage the degree of factual accuracy in their application.

The results of this survey were disappointing, with only 67% of participants stating their mortgage application was “completely factual and accurate”. This is a statistically significant fall from the results of the 2015 and 2016 Vintages.

This was offset by a statistically significant increase in respondents who stated their application was “mostly factual and accurate” (25% up from 21% in the 2016 Vintage) and “partially factual and accurate” which reached 8% of applications (up from 6% in the 2016 Vintage and 3% in the 2015 Vintage).

We see these results as disturbing and difficult to reject given approximately onethird of participants stated their application was not entirely factual and accurate.

Further, it is highly unlikely respondents would have stated that they misrepresented their mortgage application when in fact they were truthful. If anything, we believe it is more likely these figures may understate the level of misrepresentation in mortgage applications as some respondents may not want to state they were less than completely accurate despite the anonymity of this survey.

During the 2017 Survey we found a statistically significantly higher level of factual inaccuracy via the broker channel than via the bank’s proprietary networks.

However, the level of factually inaccuracy has risen across both channels. In the 2017 Vintage only 61% of participants who undertook broker originated mortgages stated they were completely factual and accurate. This is down from 68% in 2016. This compares to 75% of customers stating they were factually accurate via the bank’s proprietary networks. Of concern 11% of participants who took out a mortgage via the broker channel in 2017 stated their application was only “partially factual and accurate”. This is a statistically significant increase from both the 2015 Vintage (4%) and 2016 Vintage (7%).

While the significant level of mortgage misrepresentation is a concern, we are more concerned that a substantial number of applicants continue to state that their mortgage consultant suggested they misrepresent their documentation.





  1. How can you argue with that? We all sell, all at once, and pay off all that debt, plus more. Simples.

      • +1
        It all works out fine as long as there are enough people out there willing and able to take on enough debt to buy us all out at the current prices.

    • He has a point about blank comparisons with other countries though – if we have a high level of debt committed to investment property (which we do by international standards) then our household debt ratios will automatically be higher. So from a risk point of view, having say $200K mortgage on your $1.20M home plus a $750K investment property with $650K mortgage would look like an “extreme” level of household debt by international standards, but in reality, a 20% or 30% decline in property values would not cause this household any true financial distress. Very different if it was an $850K debt on the $1.20M property…

      • A friend of mine started building a property portfolio a few years ago. His newly built IP in Brisbane has been on the rental market for 2 months and is yet to find a tenant. This is causing him a lot of stress which surprised me given he and his wife work, have well paying jobs and little to no debt on their own home. It strikes me that liquidity is a greater risk in Australia given investors are totally reliant on rental income to service loans. When the rents don’t eventuate, the entire portfolio is at risk.

    • Philly SlimMEMBER

      “this fact indicates that householders could ‘cash out’ their financial assets, pay off all their debt and still be left with a couple of trillion dollars or around 225 per cent of household disposable income in left over cash.”

      Wow. Just wow. Ignoring, of course, the fact that for everyone to actually sell out of their house we would need to probably need someone borrow 2x or 3x current household debt just to take them out.

      Which is an interesting stat in itself. What is [current level of mortgage debt] / [theoretical max of mortgage debt if all properties leveraged at say 80%]. One of the reasons why I think housing will turn south is that there isn’t capacity in the system for the next wave of Greater Fools to borrow enough to buy out the current holders of the assets. That is the [theoretical max] is going to be a massive number that can’t be funded.

  2. Got to love the hope he has in an orderly market during a full blown crisis. Stray is truly different.

  3. Much is also made in rather less published items of the 40 to 50% of the workforce planned to be replaced by AI robotics in the next 8 or so years. Endorsed by the CSIRO, no less. Not casualised or lower paid, replaced.
    Any amount of debt is insurmountable when you have no job.

    • And the automation is coming for the new Australian middle class – white collar jobs. All those who smirked as Australian manufacturing was automated and/or sent overseas in the 90s are in for a massive jolt of karma as robotic process automation and decision-enhanced AI replaces huge swathes of our new middle class. And the biggest investors and champions of it- the FIRE sector.

      Clearly the middle office operations Exec and the residential mortgages (sales) exec aren’t talking, because the plans of the former will permanently make all the latter’s customers redundant.

    • Here is an Oxford study on AI and the workforce; see the chart for their projections.

      In the meantime an external shock will cook the Kook, but without it open the immigration gates further. No one will close them as we have nothing left to sell…almost.


      • Interesting report, thanks. My call is that if you divide all their predictions by 10 to 20 the report would be closer to the mark
        We can already win at Go, Microsoft already has headphones which will translate in real time etc.
        what would be interesting would be a summary of what level of AI is needed to replace discrete jobs, , say aircrew, train drivers, tugboat crews, then office jobs, before the unemployment level cascades into disaster
        the AI adopters will install AI as fast as they can, so they dont have to work with humans.

    • Australia can’t even manage to organise prompt modern internet services. How the hell does anyone figure it’ll manage advanced AI services?

      • LOL yep and as someone who works in technical support I can assure you no software is free of bugs… Interesting times ahead.

      • Yr right, what may occur, is that a new internet provider may be found in say google using aerial transponders to connect their own AI systems, and by pass the on ground in ground service fo providers all together,
        Puerto Rico may be a bellwether.
        what is certain is that the future wont be a linear extension of the past, whole new technologies

      • the former is national infrastructure that has been hobbled by politics since inception and run by politically appointed bureaucrats. It was also trying (and failing) to compete against a ‘once in a hundred year’ resources boom for skilled infrastructure employees/contractors.

        The latter are large, relatively sophisticated IT shops whose executives are driven by profit motives and who are relying on (high priced) vendors who are progressing AI research and productization at a phenomenal rate. IBM (Watson), Microsoft and Google (Deep Mind) already have products, market presence and executive relationships with every bank, insurance provider, retail, healthcare and government organisation in the country; and are already deploying their respective capabilities into those early adopters.

        and that’s not even touching on RPA. which is a different set of specialist vendors selling a complementary capability (as AI) to the same set of business and government customers

      • Business Process Automation is kicking off across the Banking and Government sectors. Demand for Pega Architects and Pega Developers is soaring with everyone initiating projects at the same time. In a few short years all basic processing roles will be gone. A lot of jobs in Canberra will be lost which I’m sure won’t upset MB readers….

    • @ww …here is a related post to the other link. AI bots are here, but big impact probably around 5-10 years imo. I have a few ex colleagues working on it, and that’s their guess. Small impact AI already in new product coming soon as well. The chart in this link is worth a look.


      • that is closer to the mark, mind you that is automonous AI
        human assisted AI will be available in say 1/4 of the time.
        remember in the context of 2 are required to have a job to pay a mortgage, ie if 1 loses their job the loan defaults
        so , in simple terms the period is halved again.

    • @ww …that’s true, and if not the mortgage then the rent/energy/health cover/insurances/etc. It’s a mess and will get much worse. But, don’t worry, the pollies, bureaucrats, and hangers on will not notice any change in their disposable income.

  4. Kouk: No housing bubble, so no problemo with record debt pegged against record house price inflation.

  5. TailorTrashMEMBER

    Scomo must love him …….they both believe in the same logic ……..no problem with debt because our houses are so valuable ……trillions, F$&king trillions I tell ya !
    ……..getitintaya straya !

    • Nicely put.

      It’s kinda the same logic that made people assert that Campbell Newman couldn’t be voted out after just one term because his majority was so huge.

  6. “householders could ‘cash out’ their financial assets, pay off all their debt and still be left with a couple of trillion dollars or around 225 per cent of household disposable income in left over cash.”

    It all falls over after this point. Assuming the asset values (like the debt) remain nominally constant and the debt is evenly held is ridiculous.

  7. AND….we’ve sold off most of our productive assets to foreigners in order to get the money to finance the lifestyle involved in having these houses and all the other consumption goodies that go with it.

  8. “The total value of housing in Australia is hovering around $7 trillion – yes trillion – which is over 500 per cent of disposable income.”

    “Value” largely based on debt. It’s all a Ponzi house of cards which will blow away in the breeze very quickly once things really start to go pear-shaped.

    This is such transparent nonsense, that even I can take it apart and I’m not an economist. Who is this bloke and how is it that he has a forum from which to hoot his foolishness? He surely can’t believe this gibberish, so I assume that he’s being paid a bucket of cash to spout falsehoods.

    I was thinking the other day about the thousands of Toyota workers who recently lost their jobs. How many of them would have investment properties that they now need to urgently sell because they are struggling to buy food or pay the mortgage on the roof over their heads? What will happen to the “value” of those properties? Etc etc…

    • The ASX is valued at about 1.5 trill, about half of which is hot air.
      Just organizing another short trading account this am.
      this is going to be interesting

      • ^^^^^…….The 4 banks make up 24.2% of the ASX300. Add the next 4-5 and we are up to 40%. Super funds, index funds, benchmark funds – they are need to own them seemingly at whatever the cost….while the ASX is not going down too much they just keep buying I assume. The downside looks

    • Re Toyota, drove past there yesterday and the staff car park is still full. Maybe the workers all got shafted whilst the managers continue coming in to have meetings and surf the net.

      • Maybe they are letting employees hold a car park sale to flog off some belongings to pay the next power bill.

    • The vast majority of economists spout nonsense and have little idea how an economy actually works in terms of being ‘competitive’ and generating economic wealth. The commentary is amazingly naive.

  9. Funny how the more educated they are the bigger dills they become. Should be selling stories to Disney corp. How those morons expect rational human beings to suspend their common sense and believe that the laws of market economics do not apply to Australia despite numerous warnings from top organizations in the word.

    • There is no pattern. Education cannot remedy lack of thinking ability but it can enhance it somewhat. It has to work with what is there to begin with (and this is assuming he isn´t fibbing).

    • The are no ‘laws’. Economics is largely bullcrap. The economy has significant issues and they have no idea how to address these issues.

  10. “Debt is used to buy assets which includes things like housing, commercial property and shares.

    AKA leveraging straight into a bubble….

    • The thing that this numpty does not understand is that not all investments are the same. The vast majority of investments have flowed into unproductive assets (property). None of this investment will contribute to the nations trading position and its ‘competitiveness’ going forward. The sectors of the economy that have done so in the past have been ‘hollowed out’. For instance the closure of the car industry will result in the loss of 200,000 or so direct and indirect jobs and the trade balance will take a $29Billion hit. Hoping another commodity boom will eventuate and fill the ‘gap’ is wishful thinking.

  11. Debt is the bringing forward of your future wealth today, plus a premium to pay to the lender.

    Based on current levels of personal debt, the absence of inflation, and the absence of wage growth, a few million Australians clearly believe they are going to win Tatt’s Lotto at some point in the future.

    This, of course, means that enough disposable income must be put aside each week to play the lotteries.

    • Of course Australia is different and real incomes increase will magically increase, inflation stays low, interest rates stay low, people don’t lose their jobs, property assets keep on inflating, etc.

      • Jumping jack flash

        Mate, just look at that income growth forecast!

        Don’t look at the past predictions for income growth though.
        That’s one hairy-looking line… it’ll make you sad. So shield yourself from the sadness.

        Any day now… incomes will just take off.
        Any day now my boss will just come up to me and say “Jack. Mate. Look. We’ve screwed you for the last 3 years on wages and we want to make it good. So here’s 15%. You know, to make up for the past 3 years of nothing but a smile and a pat on the back at each of your reviews, and a bit extra on top, because we’re truly sorry.”

  12. “It is vitally important to realise that households do not take on that debt and throw the cash away. On the contrary.

    Debt is used to buy assets which includes things like housing, commercial property and shares. For the bulk of the population with little or no debt, they are coincidently squirrelling away their savings and are accumulating wealth”

    The debt has mostly gone into one class of non-productive asset: land! It’s not an investment it’s speculation!

    • Jumping jack flash

      They may well have thrown it all away. It went immediately into the pockets of the vendor for them to enjoy, and the asset they hold’s price is held up by nothing but a stack of debt transactions up until that point.

    • Off course Hayden,
      we are paid enough, but land price dictate how much we are paying for: eating out, groceries, places we sleep etc. There are fewer REAL jobs to support the current land prices. MB sees the solution in devaluating currency. The reason I emigrated in OZ is exactly that. I am getting older, and changing continents is becoming harder and harder, but if I sense any policy direction in that way I will not hesitate to do that again.

  13. Just think, the Kouk is both well-regarded and well paid! Slap me with a wet kipper

    You’d think at least he’d be capable of seeing through the idiocy of the ‘net wealth’ argument i.e that it’s the debt that props up asset prices. A handful of individuals might be able to ‘get out’ and pay off debts during bubbly times but most people get into trouble when the economy is in the shitter and once the selling starts asset prices are going to hell

  14. “The total value of housing in Australia is hovering around $7 trillion”. The “value” (he actually means price) is temporary, the debt secured against it is absolute.

    • All that value will soon be lost like tears in the rain… Can you tell I watched Blade Runner again recently? 😀

      • Damn it! Tried a reply to your comment – but I get placed into the “moderation” queue… I wonder what triggered the spambot in that?!

      • Nope – can’t argue with the spambot… Can’t figure what makes it think my comment needs moderation.

      • Ino I saw your reply in my inbox haha.

        Let me try add it here.

        “… I’ve seen Sun monitors on fire off the side of the multimedia lab. I’ve seen NTU lights glitter in the dark near the Mail Gate. All these things will be lost in time, like the root partition last week. Time to die…”. – Peter Gutmann in alt.sysadmin.recovery “I’ve seen things you people wouldn’t believe. Corrupt politicians selling the country’s assets off the shoulder of Canberra Parliament Hill. I watched the gay marriage debate glitter in the dark near the ABC’s Headquarter’s Gate. All those moments will be lost in time, like tears in rain. Time to die.” — me, in Macrobusiness

      • Did you use a swear word Ino? The spambot takes exception to my posts when i for example mis-spell ‘cnut’

      • Yeah – formatting is up the creek – but eh … good enough… 🙂 Thanks Gav 😛

        @blacktwin997 – Nah – see the quote above your comment – from Gav – he’s pasted my message which got munged by the spambot in full..

        Formatting was lost in the mail (there should be a line break between the two quotes) but that’s good enough.

  15. I hate reading what the Kouk says – had to unfollow him on twitter cause of his BS.
    Point 1: Look at the Japanese bubble, or any land bubble and you will find that total value of property stock goes ballistic and with it the ratio to GDP. Our total property value is 6-7 trillion or about 4x GDP which is very high and brings us in line with other countries that have had spectacular bubbles.
    Point 2: He also says “while the household debt to income ratio has risen by around 125 percentage points over 25 years, assets in housing alone have risen around 225 per cent of household income.” This is ridiculous – with assets to income rising so much faster than the debt that backs it, this just offers more air in the giant bubble. This will rush out fast when the tide turns.

    Rather than looking at a number or a ratio and trying to dissect it, compare them to past bubbles and see if there are similarities!!

      • Yep agree as it seems to me that all these bank economists also don’t like to listen to the jungle drumbeat getting louder as they worry that it will become self fulfilling the more the impending bursting of the housing bubble is discussed about in the media.

    • darklydrawlMEMBER

      And yet there is clear research and evidence that the biggest and most reliable flag on mortgage defaults is one thing. Rising property prices. So long as they keep rising, defaults are low – regardless of the market and economic conditions – and this result was adjusted for interest rates, inflation and immigration.

      Defaults increase when house prices flat-line and accelerate significantly if they go negative. All other markers are mostly insignificant and overstated by people.

      In short – Unemployment is a symptom of falling house prices, not a cause.

  16. Jumping jack flash

    The Kouk is right!1!!!!!11

    The houses are worth what we say they are. Of course! Why would it be any different?

    They’re not worth that much because of the debt that has been sprinkled all around them and a lazy asset valuation model? Not on your nelly. Its sound fundamentals and a shortage, mate.

    Say I was a realestate agent. I can google the house down the street to see what it last sold for, add 10% and say with a straight face “its worth it”. Then all that needs to happen is a bank comes along and gives that much debt to someone to buy it. That part is pretty easy.

    Its easy! And the best thing of all? Using this method, the debt actually secures itself! The preferred calculation for “risk” (if that word even exists anymore, I don’t think it does), LVR, shows that its all roses. And it is.

    Not only that, because the price of this house went up 10% for no reason other than the buyer was able to get that much debt to buy it, all the houses around it get a boost as well, improving their LVRs and reducing their “risk”.

    A marvellous system. And the Kouk is right. If anything goes wrong, but always remember that it couldn’t possibly, we’ll just sell them for a bit more, pay back the debt, and walk away from it debt free and stonking rich!

    The FIRE economy. What’s not to love?

    • darklydrawlMEMBER

      Exactly!! And if we do all sell at once, well those prices will still be rock solid winners for every vendor – cause we’re different here and property prices cannot fall! 🙂 Easy. Most simple path to wealth. Doubles every seven years, never goes down, never been a better time to buy. Don’t miss out!

    • TailorTrashMEMBER

      Give that man a Phd in finance ……thank goodness that there is someone who understands things in Straya apart from Reusa…..

      • darklydrawlMEMBER

        If I get lucky I might get shortlisted for the next relations party with the big swinging R. Hmmmm… Might need to get some fake tan sorted though. Been a long Melbourne winter. That goth pasty look might not rock it so well, pool side in the Emerald City.

  17. This bloke Kouk has no right pontificating on any market. Stick to the theoretical sport! Unless you have bought an asset with actual volatility and with leverage then you’ve got no right to tell people how to do it. Working in economics at an investment bank does NOT entitle you to assert experience over how markets will work in practice. Fark me the cleaner at Citi probably has more gravitas in his/her opinion than the “don’t worry people, the assets you’ve bought with eye watering leverage will protect you”. I’m now very scared on what is going to happen

  18. Auction Price guide for this house has dropped…from $1.25M to $1.15M,what does this mean for the market? https://m..com.au/listing/2013880039