It’s never as simple as looking at just one side of the coin. That’s why financial analysts find ratios so useful. They provide a more complete picture and, usually, more insight.
Take Austalia’s property market as a useful case study in this lesson. If you look at GDP alone, just one side of the coin, Australia and the U.S. seem fairly similar. Look here…
Australia’s economic growth has been stronger (thanks to China) and a more pronounced “hiccup” in the trend is evident in U.S. GDP. But otherwise, both trends are up and moving higher.
Now, let’s look at a financial ratio… mortgage debt-to-GDP.
This measure shows how many pennies of mortgage debt a country owes for every $1 of economic growth, or income, it has to make said mortgage payments. It’s a good indicator of how far stretched the market property market is.
Here’s this chart…
As you can see, this is where the U.S. looks significantly different from Australia. The divergence began between 2009 and 2010. While U.S. GDP growth moved higher from early 2009 onward, we saw a huge drop in mortgage debt.
Foreclosures happened by the thousands. Debts were forgiven or written off. And practically no one was signing up for new mortgages.
This created the severe drop in the U.S. mortgage debt-to-GDP ratio – from 86% to 68% – you can see above. Australia’s ratio also dipped, but only slightly – from 87% to 84%.
So by this measure, the Australian property bubble is still stretched far beyond what is sustainable. China has kept the land down under from… well… going under… but it can’t save the Aussies forever.
As the Australian dollar loses value and commodity prices continue their descent… watch for weakness in the Australian property market.
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