Scott Morrison's household debt remarks labelled 'inane and stupid' by finance experts

Extract from ABC News

PM

By David Taylor

Updated about 5 hours ago

Photo: Scott Morrison said the net worth of the household sector is greater than the debt being held. (ABC News: Adam Kennedy)

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Several finance experts have been scathing about Scott Morrison's comments on large amounts of household debt.

Key points:

• Scott Morrison says Australians should take comfort that rising asset prices are offsetting big debts
• Analysts have called his comments "inane", "stupid" and "shallow"
• They warn asset prices will not stay high forever

Treasurer Scott Morrison told a gathering in Sydney yesterday that households carrying large amounts of debt should take some comfort from rising asset prices, including house prices.
Investment expert Roger Montgomery, who manages more than $1 billion worth of funds, did not hold back in his criticism.

"I think that is one of the most inane and stupid things I have ever heard," he said.

Mr Montgomery argued the very reason for the rise in asset prices is due to the debt used to buy it.
He said it would not take much for highly indebted Australians to be caught out, unable to service their financial commitments.
"The reality is that firstly, if house prices are elevated because of debt, there should be no comfort in the price of a house — it's elevated simply because of the debt.
"When interest rates start going up — and they will as soon as, in some cases February for some of the banks — investors are going to find they won't have a tenant, or they won't have a tenant and they'll have higher interest rates to pay, and that debt will come home to roost."
Urbis economist Nicki Hutley was also surprised by the remarks.

"I think it probably is a little bit of a shallow statement," she said.

She noted that for every $1 Australians earn, on average, we borrow about $1.50.

The recession we're already in

It might not look like it from Sydney and Melbourne, but much of Australia is already in recession, writes David Taylor.

Ms Hutley said a combination of ultra-low interest rates and financial deregulation has produced a seemingly endless numbers of inventive ways consumers can max out their credit cards.
"So you can borrow against your house for a second property or you can borrow against your house to pay for education or a holiday — we have lots of different ways, we have lots of different forms of credit and payments, so we've expanded the ways that we can borrow."
She argued that though the risks are minimal, borrowers remain financially vulnerable.
"There is some vulnerability to a shock to the system, not that we'd expect there to be something like a big strong rise in unemployment or interest rates that could cause that shock in the near term or even in medium term, but certainly there is some risk to it."

Morrison offers comfort to borrowers

On the global financial stage, Australia is generally considered a bit of a lightweight, but the nation punches well above its weight when it comes to debt.
Households are currently shouldering personal debt worth around 125 per cent of GDP, with mortgages making up the majority of that debt.
In his speech to the Australasian Finance and Banking Conference, Mr Morrison said there was some "comfort" in the concentration of debt among wealthier Australians and current record low levels of interest rates.

Recession we won't have to have

Australia may have received an economic "wake-up call", but a recession still looks very unlikely, writes Stephen Letts.

However, Mr Morrison then pointed out that, despite huge piles of debt, the net worth of the household sector had risen roughly 80 per cent over the past decade.
"This means that there are assets against these liabilities," he said.
"In fact the aggregate asset holdings of the household sector are around five times greater than the debts of the household sector."
Australians are not just borrowing against their homes. Those with the means to invest their money in shares, are also using their stock portfolios as collateral.
Baillieu Holst private client stockbroker James Rosenberg said debt can be a real financial trap.

"What's the oldest adage — that debt's your best friend and your worst enemy."

Mr Rosenberg said it would be a mistake for any leveraged investor to assume housing will never come down in value.
"It's a popular myth, but that's all it is. It has happened several times in history and it'll happen again."
Mr Montgomery agrees, pointing to the already obvious cracks starting to appear in the housing market, which is putting pressure on property values.
"I think what Scott Morrison is saying, is he's trying to be comforting, but really investors should take no comfort from it at all."