When you see someone living in a nice house, driving a nice car, wearing a nice suit and sporting an expensive watch, what’s your first thought?
“That person must be doing well” or “that person must have a lot of debt”?
These days it’s hard to tell who has money and who owes money; readily available credit has seen to that.
The reality is, many people are right on the edge financially, and while they might dress like they have wealth, in truth they can’t actually afford it.
Unfortunately, the Australian dream of owning a home is partly to blame. Aspiring to own property is not a bad thing. If you can afford it, it’s probably one of the best things anyone can do. The key here is being able to afford it, especially when things don’t go to plan.
Mortgage stress is continuing to increase across the country which is concerning given we currently have some of the lowest interest rates in history. So if people are struggling now I fear it’s only going to get worse. With three of the major banks recently approving out-of-cycle interest rate rises, the question is, “Is that it or is it just the start?”
Our market is driven by public perception; if people think the economy is good and that interest rates will remain low, they spend, and vice versa. In short, people’s feelings often dictate their behaviour. But the market doesn’t always react as you would expect.
Perception has been working in our favour for quite a while now, however the sunny days we’ve all been enjoying are starting to get a little overcast, and I, for one, am hoping a storm isn’t looming.
I recently spoke to a mortgage broker who told me that in 2008 his firm’s average loan size was $400,000. It’s now over $800,000. Just think about that for a minute: That’s more than a 100% increase in twelve years. Does that sound sustainable to you?
Learning this I jumped onto the Australian Bureau of Statistics website and looked at wage growth over that period and found that
While ABS data shows wages have increased slightly, they haven’t come close to keeping pace with the cost of property and the debt people have to take on to buy a house. Is it any wonder many people are struggling to make ends meet?
It’s not just loan sizes that have increased either; we’re all paying record prices for things like utilities, insurances and school fees, just to name a few. Combine this with many people’s cavalier attitude of “she’ll be right” and you have all the ingredients for the opposite.
Australians love property, so much so that we are often willing to extend ourselves way too far to have it. Many people also have investment property loans as well as a mortgage for their home.
That same broker said that he’s seen many loans involve the purchase of an investment property using the family home as security where the combined loan size was well over a million dollars. This may be fine when interest rates are low, and properties are increasing in value, but what happens when it all starts to turn?
I fear that we’ve had it so good for so long many people think it will never end. It’s fair to say that the hot property run we’ve all enjoyed for some time is over as property values stabilise or in some areas retract.
The banks are aware of this as they are now very slow to take possession of properties in certain locations, knowing their equity position is not what it was when the loan was taken on. They know that forcing the sale of some of this stock would do two things: 1) crystallise a loss and 2) confirm the reduced value which would then affect not only that property, but all the properties in the area. This is particularly relevant with some unit developments where values have fallen quite significantly in some cases.
One thing’s for sure, with household and mortgage debt as it is, we definitely don’t want the property market to deteriorate any more than it already has, however I fear this may be unavoidable.
I know I sound like the grim reaper, I don’t mean to, but it’s important we don’t lose sight of what we are all trying to achieve; a happy life with at least some freedom of choice. Unfortunately, in pursuit of the Australian dream, many lose their way and instead of moving closer to this goal they get further and further away from it.
The next time you look in the mirror, ask yourself this question and be honest with your answer… “Can I survive if the repayments on my debts increase?”
If your answer is “yes” then great, keep doing what you’re doing and don’t give any of this a second thought. If the answer is “no” it may be time for a rethink.
John Dickinson is the director of DebtX Mediation Services, a debt mediation company focused on helping people regain financial control through the reduction and elimination of their debts. Learn more at www.debtx.com.au.