Opinion: Bandaid Economics Cause Long-Term Pain
It Might Sound Impressive, But Buyers Should Beware, Writes Caroline Di Russo.
The world has had a tumultuous 18 months: travel is restricted, supply chains are interrupted, people have been locked down and businesses mothballed. The global economy is circular, and for the economy to function, it needs to be constantly moving. To mitigate the inevitable consequences, governments around the globe have been spending like freshly minted Lotto winners. And while this spending will band-aid over some short-term cracks, there are a few indicators suggesting things won’t be pretty in the longer term.
But let’s talk about this in an everyday context: housing and household debt.
So, why am I whinging? Unemployment is lower than before the pandemic, the participation rate is up, the property sector is booming, consumer confidence is high and residential construction is so off the charts, you can’t get a place built for love nor lap-dance.
Well, the great spendathon has stimulated confidence and demand, and has got businesses hiring again. The flip side is that government policies aimed at keeping residential construction ticking along have also fueled asset prices with low interest rates providing a little extra lubricant.
But I have this niggle. Why? Well, following the GFC, I mopped up residential and commercial assets for the banks.
And it wasn’t pretty. So, it makes me a little uneasy watching house prices skyrocket, while wages remain flat, and people become increasingly desperate to get into their own home.
Anyway, here are the numbers on household debt.
As at January 2021, Australian household debt was 123.5% of GDP, and as at April 2021, consumer credit had burgeoned to
$3.04t while the household savings rate was 11.6% of net disposable income. The savings rate has spiked sharply from 3.4% last July when people finally realized they probably shouldn’t spend everything they earn.
If you’ve saving a deposit for a house, that money is sitting on its fat arse not earning you a cent
Those are pretty hefty numbers but let’s make a generational comparison to see how we’ve got to where we are. At the time of the last recession in the early 90’s, household debt was approximately 45% of GDP, consumer credit was approximately $350m and the household saving rate was approximately 10% of net disposable income. At the time of the GFC, household debt was approximately 115% of GDP, consumer credit was approximately $1.7t and the household savings rate was approximately 5.5% of net disposable income. In short, and even accounting for inflation, we have progressively saved less and accumulated more debt.
Our current saving grace is historically low interest rates – the cash rate is 0.10%. You can still get variable interest rates under 2% but fixed rates have nudged back over 2% signaling that we’ve hit the bottom of the cheap borrowing bonanza. But if you’ve saving a deposit for a house, that money is sitting on its fat arse not earning you a cent. Anyway, compare the current cash rate to the early 90s when it was around 17% and in the 2000’s when it was around 7%. Evidently, borrowing money has never been cheaper.
But here is the kicker.
Matusik has recently released some modelling which suggests that at present 40% of Australian households can borrow $500,000 to buy a home. In some capital cities, that’ll get you a donger in the carpark of the local fish and chip shop. Even more sobering is that Matusik predicts that just a 2.5% lift in mortgage rates, which is still historically low, will reduce the number
of potential households able to borrow $500,000 to just 9%.
Unfortunately, the landscape worsens when you overlay asset price growth with wage growth – the latter of which has been in steady decline since 2009 from around 4.25% per annum to about 2.25% per annum. But when you strip out inflation, real wage growth is actually going backwards. So, while asset prices and debt levels are increasing, relative purchasing power is waning. And we are already seeing this mess starting to play out and interest rates haven’t even moved yet. In May 2021, according to Digital Finance Analytics, mortgage stress levels rose to 41.1% of borrowing households – that’s 1.52 million households across the country.
In short, the outlook for housing affordability is not pretty and is exacerbated by misguided government policy. And together with increasing interest rates and weakening purchasing power, household debt may just become the slavery of the free.