Friday, January 20, 2012

Global Deleveraging only just begining

McKinsey & Company is a global management consulting firm which bills itself as "the trusted advisor to the world's leading businesses, governments,and institutions".

In a report released today, McKinsey notes that total debt to GDP has declined in only three countries since the 2008-09 crisis: the United States, South Korea, and Australia.

As we all know Canada has not only NOT seen their total debt to GDP decrease, it has hit historical highs.

In fact, total debt has actually grown in the world's ten largest mature economies due mainly to rising government debt - Keynesian style.

McKinsey notes that the US is following the two phase deleveraging process that 1990s Finland and Sweden followed but point to the household segment as leading the way with 15% reduction in debt to disposable income (driven unsurprisingly in major part by mortgage defaults).

The bottom line in the report is that US (households) are at best one-third of the way through their deleveraging and the UK (financials) and Spain (non-financials) face much more significant pressures (which will inevitably impact aggregate demand given governmental borrowing pressures) as their deleveraging has only just begun.

It's interesting that McKinsey mentions Australia.

Faithful readers know that for the longest time Canada and Australia stood above other countries in the Western world for having seemingly escaped the imploding real estate bubble.

Both were viewed as commodity rich countries which were being fuelled by Hot Asian Money.

Both real estate markets were - supposedly - immune because of rich Asian buying up land there.

But as we have noted numerous times on this blog, 2011 was a turning point for R/E in the Land of Oz.

And perhaps nothing hilights this fact more than real estate auctions in Australia.

Unlike North America (where auctions are used to sell distressed and foreclosed properties), the use of auctions in Australia is one of the main means of housing sales and their results are often a barometer of the market’s strength. Aussie newspapers even devote entire sections to auction sale results.

But 2011 saw the reality catch up the housing market in Australia and after home prices fell the most in at least 12 years in 2011, home auction results foreshadow another year of declining Aussie home prices.

According to Bloomberg the Aussie auction sales are tanking. Peter Green, a principal at Australian property broker Laing+Simmons, “in the last three months, the number of people visiting open houses has been cut by half. And buyers may show up to auctions, but they don’t bid.”

Half of the homes that went to auction in December failed to sell.

Bloomberg notes Australia escaped the housing rout seen in the U.S. and Europe, in part due to government measures to boost demand in the wake of the collapse of Lehman Brothers.

As we all know, this is exactly what Canada did too.

In 2011 Aussie housing prices recorded the biggest drop since Brisbane-based RP Data began compiling figures in 1999.

For years Australia has used the rationalization of money from China as the reason their housing bubble will not implode. But now Australia has begun their develeraging process.

Will Bloomberg be writing about Canada next?


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  1. The banks have goosed the market one more time with their lower rates...should be good for a few more weeks of denial.

  2. A few weeks, at most.