Magnified Expectations and Bloating Debt

Technology companies in the US are booming.

And, the expanding tech economy is also having an incredible growth effect on the cities that surround it, especially in property…

As Bloomberg reports, tech cities are seeing property rises of as much as US$800…a day! This is much higher than the daily US$56 national average.

San Jose in California has seen some of the biggest increases. Properties are appreciating at a whopping US$798 per day.

Seattle’s property market is increasing at a more modest (but still high) US$433 a day. San Francisco is adding US$481.04 daily and New York US$337 per day.

As Bloomberg said, appreciations in some of these tech cities equal a six-figure annual salary. Not too shabby for a second income…

But, wait…

…hasn’t Melbourne seen some similar crazy price increases too?

According to Real Estate, in the 12 months before 30 September 2017, some homes in Victoria were appreciating on average by as much as $2,322 per day. Ok, that amount was in the expensive suburb of Toorak…

…But, St. Kilda West also increased by $1506 a day.

That’s a bit more than the average household makes in a week! According to the 2016 Australian Bureau of Statistics Census, the median weekly household income in Victoria is $1,419.

In the same period, Carlton increased by $1320, and Collingwood by $887 per day.

Household debt takeover

Meanwhile, wage growth has been plummeting. It is now just above 2%.

So it’s not surprising that in recent years households have been getting into larger mortgages to get into the frenzy…and consequently, higher debt.

Household debt to disposable income reached a record high of 188.6% in December, according to Corelogic.

And we are starting to see an increase in mortgage stress.

According to recent research by Digital Finance Analytics (DFA), mortgage stress is on the rise. They estimate that around 956,000 Australian households (or about 30%) are suffering from mortgage stress.

Why?

As DFA reported, ‘flat wages growth, rising living costs and higher real mortgage rates are all adding to the burden.

You can see that the increase in mortgage stress (yellow line) since this time last year has increased by almost 10%:

Mortgage Stress 11-04-2018


Source: Digital Finance Analytics
[Click to enlarge]

DFA defines mortgage stress when a household spends more on a monthly basis than what is coming in. So, they then either cut spending, use more plastic, refinance, or have to sell their home.

DFA is seeing more mortgage stress in all areas of the social spectrum, from the affluent to the disadvantaged.

As Martin North from Principal of Digital Finance Analytics said:

We continue to see the number of households rising, and the quantum is now economically significant. Things will get more severe, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at two to three times income. This is not sustainable and we are expecting lending growth to continue to moderate in the months ahead as underwriting standards are tightened and home prices fall further.

Australian property prices are falling

Prices are already falling.

According to Corelogic, prices across Australia’s capitals in March fell by 0.2%, with Sydney dropping 0.3% and Melbourne 0.2%.

For the quarter, the combined capitals dropped 0.9%, with six of the eight capital cities registering a fall. Sydney fell by 1.7% and Melbourne by 0.5%.

As you can see in the chart below, in recent years, the value of household assets has been increasing quicker than debt. Yet, we are already seeing that trend change.

The price of household assets (blue line) has been slowing its growth. Meanwhile, household debt (black line) has continued to expand. Falling property prices could mean that the value of debt starts growing quicker than the assets.

Annual change in household debt to income vs. assets to income 11-04-2018


Source: Corelogic
[Click to enlarge]

If prices keep on dropping, many households could find themselves in the same situation as households in US or Spain in 2008. That is, where they have a mortgage that is higher than their property’s value.

If they sell, they will lose money…or even worse, they will be left with debt.

And this is a likely possibility.

As Morgan Stanley said recently, the prospects for growth in the residential property market are the worst in 30 years.

Why?

As The Australian Financial Review reported:

Conditions for housing for the remainder of 2018 continue to look challenging with further regulatory tightening of credit, an increasing stock of properties to be settled, and continued uncertainty on government policy for housing as the election looms.

And, with so much debt in the system, falling property prices could have a negative economic effect in Australia.

We are already seeing an increase in households suffering mortgage stress…at low interest rates mind you!

High debt leaves households more exposed to rising interest rates. Banks around the world are starting to raise rates, which could put some pressure on the Reserve Bank of Australia to do the same at some point.

If incomes don’t rise, or if unemployment starts to increase, things could get even worse.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: Port Phillip’s Editor Vern Gowdie has been warning about the dangers of high debt level. In fact, he is convinced the next ‘Great Crash’ is coming. That’s why he has outlined a step-by-step plan to survive it.

If you want to find out more, you can click here.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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