Household Finance Contingency Planning

A monsoonal trough in the aftermath of Cyclone Wanda caused around 900mm to fall in the South Eastern Queensland between the 24 and 29th of January 1974. These floods were the worst to hit Queensland since 1893.

Back in 1974, Australian’s saved for a rainy day. According to data from the Australian Bureau of Statistics, at the time Australians were putting away the average of 15.3 percent of their household disposal income in the piggy bank. This little nest egg of savings could be drawn on at time of disaster such as a flood. Debt was also manageable during this era. While RBA statistics only date back to 1977, in 1977 the average Australian household had 33.2 cents of debt for every dollar their household earned per year.

In the aftermath of this weeks flood, Queenslander’s are not only drowning in water, they, like most Australians are drowning in debt. Today, household debt levels have ballooned out to 159.2 percent of household disposal income, that is for every dollar a household earns this year, they will have $1.59 of debt or 4.7 times the debt that had during 1974. 89 percent of that debt is locked into housing and unfortunately for some, that is the asset that is underwater. Households today are extremely leveraged time bombs.

With so much debt, there is not much opportunity to save for a rainy day. Since 2002 to the start of the global financial crisis, we were spending more than we earned, i.e. we were depleting any savings we had. The GFC wacked us around to a little extent, and households are once again saving for that rainy day, but to a very small extent.

While the 2011 floods have not broken the 1974 record in terms of river levels, the devastation is likely to exceed that of 1974. Today, there is more housing and much denser housing in the same area. But what is not yet clear is the impact to household finances. With so much leverage today, is there any spare capacity in household budgets to get through the tough times?

Our hearts go out to everyone affected by flooding.


  1. Yes, our hearts go out to these people. However, many of the same people have not insured or under-insured, fully expecting the taxpayer to foot the bill for the floods – why should they insure if the taxpayer will foot the bill ? Makes no economic sense to them. Then again, maybe the insurers just won’t let them insure, or only insure up to certain amount. In that case, there should be some sort of system to manage the costs of such floods. I heard on ABC radio that there is a proposal for a new kind of “insurance” – instead of spreading the cost to others who are not exposed to potentially catastrophic weather on a periodic basis, the new kind of insurance will be similar to “forced savings”. So suppose this had been in effect since 1974, imagine the pool of savings that would have been available now for rebuilding

  2. On the topic of savings, I would also like to add that it doesn’t make sense to save to today’s economy. Govt policy seems to actively discourage savings. What’s the point of saving when saving income is taxed at the marginal rate, when interest rates have been kept so low in the past and now with the issuance of covered bonds by banks, your savings are not even safe (subject to confiscation by banks should they run into trouble). Putting savings into the stock market is not a sure bet either. Fine if there is a true market economy with a level playing field- but markets are so susceptible to manipulation, insider trading and outright fraud, which the govt makes absolutely no attempt to discourage or even prosecute. Even when they try, clever lawyers and accountants will defeat any attempt to stop the fraudsters. Look at China — everyone is saying how China will save us. However, if you look closely, you will see the immense corruption and fraud at every level of society and that the Chinese are so distrustful of authority and economic leaders that they will pour their considerable savings into bricks and mortar (which they are see and touch) instead of trusting it with the banks or stock markets. The Chinese are happy to have whole cities unpopulated because the buildings themselves are their “savings”. You think the CHinese will have a vibrant economy ? With so much distrust in the markets ? Like I have always said IF YOU DON’T HAVE TRUST, YOU DON’T HAVE AN ECONOMY.

  3. Are they not insuring because they expect tax payers to foot the bill, or simply because household budgets are extremely tight these days, and insurance is a luxury item?

    Wasn’t it the same with the Victorian Bush fires. After that event, the government was amazed by the few people that had insurance, that they set up an inquiry. A lot of people had insurance 5 years ago, but as living expenses (housing costs) exceeded that of incomes, insurance was one of the discretionary items they could no longer afford.

    I do understand with flood cover it is a lot more expensive, so this will only exacerbate the issue.

  4. Lost in Oz, you are mainly right in what you say, but it was clear in 2005/6 that saving in gold and/or silver would be better than in the bank. 2008 kind of messed that up a bit but make no mistake PMs will be where to have your money the way things are going. Log on to Perth Mint and see what your options are. Covered bonds can also be bought instead of a deposit or term once the gov’t guarantee wears out late this year, if you worry about banks eventually defaulting and grabbing depositors savings for bondholders.

    If you can’t afford the insurance, you can’t afford the house. I don’t have any RE at present and after touring the country I can’t see us buying in a city ever again. It’s a bit of a wrench deciding to sell a house and not buy another but this time around it will probably mean significantly cheaper prices. In country areas prices are down significanlty already.

  5. These floods will prove to be the black swan for Aussie house prices. I’m happy to know the Australian housing bubble is deflating, but sad to think about the devastation faced in Queensland by ordinary people.

    La Ninas will dominate summer weather patterns on the east of Australian for many years. La Nina occurs when colder than average sea temperatures in the Pacific combine with stronger winds and increased cloud density to alter weather patterns in Australia. La Nina and El Nino events are clustered every 10-40 years (not random) and the previous run of La Ninas happened between the 40s – 70s (and ended with the floods of 74). They were followed by around 30 years of dry El Nino patterns. We will see much wetter summers and greater flood risks from Rockhampton to the NSW central coast for the next 30 years. Even though La Ninas usually dissipate by April-May, intervening months can still bring monsoonal rain to soaked catchment areas.This return to La Nino cycle will have a devastating impact on Australia, worse than last time due to increased population density in the affected areas. It’s likely we face 30 years of extreme La Nina weather events.


  6. More concerning is how dumb some people have to be to believe it. . . And its not as if there is no precedent. You just have to look around the world to see what will happen – U.S., U.K. Europe. The writing is on the wall.

  7. Dude, China buys our minerals.

    The USA, U.K and Europe don’t export coal and steel to China. What they have in resources they consume themselves.

    People go on about China slowing down but I don’t really see it happening for the next say 100 yrs.

  8. Our minerals? Are we really the beneficaries of the minerals in the ground here? We just had, or are still in the midst of the biggest resource-commodites boom ever (I can’t verify that, its’ another “as they say” things), and yet we’re borrowing so much money from foreign investors, and not from our own mineral-resource boom.

    I don’t think China will slow down, at least not for long anyway. I think China could hyper-boom and we’d still go broke. Whoever (in Politics) has pointed to *our* resources and said, “Dear me! Look at all that wealth”, has been quickly been knocked out of the way.

    Rex Connor was the first (just under 40 years ago), also know as Mr. Buy Back the Farm, they knocked him out for allegedly attempting to acquire dodgey funds to buy back *our* mines, and farms. The second was Mr. Super Profit Tax K. Rudd.

    I think some (like very few) powerful interest have their hand in our resource pie, and our sovereignty comes out second best.

    Can someone please explain how China buying/consuming our resources (on mass), and the wealth we get here works? Why would the NAB, Westpac and the RBA have to secretly acquire funds from the U.S. Fed if this resource boom is in full swing? Shouldn’t our banks be hyper-cashed up cause China buys our minerals? Unless of course, those minerals aren’t ours.

  9. What you say is probably right. But the market can stay irrational longer than you think.

  10. China will not save us because we have become too expensive in a lot of other areas, the minerals we sell do add a lot of income into OZ but the problem we now face is the only way to control the inflation created by all this money coming in to our econ in one area is that we will see higher interest rates than we do now, but this will have a big negative on a lot of other areas of the econ. This will have one simple effect and that is to keep driving the price of property down until interest rates start falling or wage grownth makes up the differance, but this will not happen fast and in the mean time property will keep falling for the next few years of maybe even longer.

  11. AverageBloke, I am assuming that you’re not being serious with your China comments,

    Most of what China buys from us in mineral exports is being used to build ghost cities, cities with no population to occupy them….. how long do you think such a crazy situation can go on for? 100 years? I doubt it.

    I honestly love this garbage about “The Mining Boom”, like it has absolutely no impact on my life…. I don’t get anything out of it, nor does anyone else in Melbourne or Sydney unless they own shares in the respective companies.

    All I’ve noticed over the last decade is a massive build-up of debt and prices rises on everything from utility bills to food and petrol. And with most of those rises I have not seen an improvement in the quantity or quality of what I pay for, in fact I think some things have gotten worse. I still think Australia is on a path to economic ruin.

    This nation is very unproductive for it’s size and the resources it has now and those it used to have (wasted), the most productive portion of the population are taxed the hardest, while the non-contributors get free cash from the government for every reason under the sun.

    We are becoming a welfare state (soon to be a basket case state), where the individual is not required to be responsible for themselves, why insure yourself or your home when the tax payer can cough up on your behalf if you screw up.

    China does what it considers best for China, it is not doing anything to help the rest of us, this should be expected of any nation. After all a nation should look after its own people first…. charity begins at home, another lesson the politicians need to learn here.

    Our economic future is going to be very ugly, not to mention scary.

  12. @AverageBloke, irrational? YES, very much so! Even Geoge Soros claims his fortunes have come from peoples irrationality and emotion, I see too much of it. To add to this, people (the few I know) that are very financially prudent, have no debts, have savings, own outright whatever they have, and drive a modest yet decent Toyota or Mazada are concerned over this irrationality too. This comes from the other (very few) people I know, that haven’t paid out the lease on the Audi they just traded in for a new Audi and a new lease. And the whole lifestyle that comes with such virtues/vices 7 credit cards can bring you. And now you’re telling me this irrationality can go on longer than I think? That’s a pretty hard kick in the guts AverageBloke seeing I’m in the prudent description above, and I’m the one that will probably stay awake longer before falling asleep at night. Not just irrational Av’Bloke, upside down too. The prudent group are becoming more modest, while the debt-rich are becoming even bigger show offs.

    @2bob, I have a really bad gut feeling that this inflation is caused more by your (mine too, just in denial) Governemt and RBA taxing (extorting) us to pay back, obliglations we are not completely aware of. For starters there is that $10 Billion your going to give CitiGroup in bailout funds from now to 2015. The U.S. Fed will want the money it gave to Westpac, NAB, and the RBA back. There’s the money our (broke?) Federal and State Governments owe to God knows who, they have blown. All those overpriced mortgages people put their hand up to buy that house, now tracable to the hands of foreign investors, want their money back. I don’t know if this inflation can be put squarely onto China being our customer. Some things (especially vagatables) have shot up really high in price. It just doesn’t make sense.

    @Romsey, I think I’ve smelt the same rat. Here is the contigency I see, those of us that are still generating income, will be (as we currently are) taxed more in the form of taxes, levies, price increases,…etc, in order to fund debt obliglations and the increasing number of dependent people. Reduce the amount of money allocated to the dependant people, and you’ll reduce comsuption as well, also having a negative economic impact. Is like an either way you’re st*ffed situation.

    I think the economic future will be very ugly and scary for many people, but also grand for many too. Here comes a two teir society.

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