When I bought my first home back in 1973, Australians were being advised not to pay more than 25% of their net income on their mortgage.
It was sound advice and one, even the banks used, to calculate whether the mortgagee would be able to meet the quarterly repayments. As a further rear guard action, banks would only loan up to 75% of the property valuation.
Back then, your local bank manager actually cared about your future ability to meet your commitments when interest rates were similar to today’s rates, at around 6%. But that is where any similarities, between then and now, end.
Today, homebuyers are paying an average 30% of their mortgage. It is symbolic of changing attitudes that work in favour of the banks, mortgage brokers and property developers. But not the mortgagee. Many mortgagees are paying over 50% of their net income on their repayments.
Today, they are clinging precariously to a tightrope, swaying in the wind. With wages stubbornly static and prices creeping up by stealth, the broader Australian mortgage belt is showing signs of stress.
The Household Financial Comfort survey of 1500 households in June, conducted by ME Bank shows that the average Australian is now eating into their savings to meet their weekly commitments.
“The report revealed housing stress is still prevalent among Australian households. For those with home loans, a broadly unchanged 45% of households reported to be contributing more than 30% of their disposable income towards mortgages during the past six months – a common indicator of financial stress.”
This is a matter of serious concern for the nation as a whole and especially for the Reserve Bank. It is household debt, not national debt, that has the capacity to bring our nation’s economy to its knees.
The report tells us that 10% of households are now spending more than they earn. That means they are either digging in to their savings and/or further increasing household debt (borrowing more).
So, here we are, listening to all this rubbish about jobs and growth, balancing the budget, a future return to surplus and other such meaningless policy directives, while ignoring the one issue that has the potential to undermine the entire economy, literally overnight.
We all saw how quickly the collapse of Lehman Bros set a cat among the pigeons on Wall Street in 2008. We have seen here in Australia how, despite the recent levels of jobs growth, unemployment and underemployment have not moved to any greater or lesser degree.
Our economy has been growing over the past two years on the back of immigration and deficit spending, not balanced budgeting or surpluses. We are now a country of 25 million, up 2 million since 2013. It is that increase that has kept us in growth nationally.
The Household Financial Comfort survey is now telling us that our national growth is masking a serious problem, that of over-extended household debt, a debt that is becoming increasingly harder to manage.
Reserve Bank Governor, Philip Lowe has expressed his concern about the slow pace of wage growth and its impact on economic activity.
Is the government listening? It would appear not. Their approach is to give tax cuts to big business while ignoring rising household debt.
What happens when the savings run out and credit cards have reached their limits? That day isn’t far away. It will require a massive injection of government spending to avoid a catastrophic collapse, one that would have a far more significant impact on the Australian economy than that of the GFC.
It’s one of those hidden dangers that only rears its head when it’s too late. The government is under the illusion that all will be well if we lower the tax rate for big business, because it will create more jobs. What hogwash!
Where are the economists’ warnings? Who is advising this compromised government indebted to its masters at the IPA and ignoring CEO pay binges? Who is warning of an impending mortgage meltdown?
For all those frogs in the saucepan, the temperature is rising.