Move in Now, Pay Later

From website:

Apartments WA have introduced an exciting new way of purchasing apartments to the Perth market, designed to help homebuyers with little to no deposit. Called Preposit, the new initiative helps potential homebuyers overcome one of the biggest hurdles of homeownership…

‘Preposit offers a solution to the issue, allowing homebuyers to save for a deposit while living in their new apartment. “With Preposit you get the keys to your apartment and can move in straight away,” Mr [Chad] Toquero [Apartments WA Sales Manager] said. “Then you can go about saving your monthly rental payments which will be stored away and returned to you when you have enough to pay the deposit…”

‘“Think of it like Afterpay – The person agrees to buy the property now and gets to move in straight away, but the property is only settled once they have saved their

This ‘Afterpay for real estate’ scheme is the latest initiative from sellers to try and breathe life into a deflating property market.

From lowering prices, raising commissions, offering cash or even Qantas points. Lenders and developers are getting creative with incentives as the property market slows and credit tightens.

I mean, you only need to look around you and notice how many home loan ads have recently popped up everywhere.

The latest auction results from Domain shows the results at 63% for Sydney and 61.3% for Melbourne. This week last year, the results were much higher, at 69.7% for Sydney and 73% for Melbourne.

Only a few months ago, we were seeing homes beating sales records and going for well above the reserve price.

Today, things have definitely changed. As one auctioneer described it this weekend in Sydney, selling a home was ‘like pulling teeth.

There is a considerable number of apartments that will hit the market in the next couple of years…and credit is tightening.

Regulators have been restricting credit for investors. In addition, the Royal Banking Commission has highlighted some questionable lending practices. This could mean that credit will tighten even more.

Sellers are starting to panic. They may not be able to flog the large amounts of apartments coming into the market.

And even with high incentives, buyers may not take the bait.

The thing is, household debt is already high

According to the Reserve Bank of Australia (RBA), in the last 20 years the household debt to income ratio has pretty much doubled. It has gone from 98.6% since March 1997 to almost 200% today.

Debt binging and consumer spending has been driving the economy. Household spending accounts for 55% of the Aussie economy.

Yet high debt, low salary growth and higher expenses means that households are starting to cut down on unnecessary spending.

A decrease in consumer spending could mean that high debt is starting to take a toll, and that households may be finally saying ‘enough’ to debt.

As RBA detailed in their latest statement, slowing household consumption is a concern:

One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high…

With high household debt and credit tightening, we could see a slowdown. 

In fact, a recent report from the International Monetary Fund (IMF) suggested just that. That is, that increasing household debt to GDP will cause an initial boom. Yet it will later revert causing higher unemployment and a real GDP decline in the future. As they wrote:

‘Debt increases in already highly indebted households may be hard to sustain when facing a negative income shock, leading them to drastically reduce consumption and default on their debts.’

According to the IMF, the relationship between increasing household debt and financial crisis is more marked when household debt is high (at 65% of GDP). In Australia, household debt to GDP is at about

And this debt could become a burden if interest rates start rising.

Asset prices have been soaring on the premise that debt will remain cheap for long…and it may for a while. Yet with such high mortgage debt, many may have to sell if debt becomes more expensive or unemployment increases.

The US Federal Reserve bank has already started increasing rates. The Fed expects to continue raising interest rates gradually as unemployment figures stay strong.

The RBA and other central banks in the developed world may have to follow.

And that could put the last decade´s developed world ‘recovery’ in doubt.

You see, high debt is not only an Australian problem.

Word debt ratio is now a whopping US$243 trillion, or 320% of GDP. Since the 2007 financial crisis, we have added around US$140 trillion in debt…in the last 10 years!

Higher interest rates will make that debt insurmountable.

As Maurice Obstfeld, the IMF’s economic counselor recently warned, advanced economies have not recovered their growth rate from before the crisis. This means that the global recovery we are experiencing may not be sustainable. And, as he said, we are risking ‘disruptive repricing’:

The recovery is also vulnerable to serious risks. Financial markets that ignore these risks are susceptible to disruptive repricing and are sending a misleading message to policymakers.

With high debt, stagnating wages and the threat of higher interest rates, Australia is facing major risks in the housing market. It could make it more vulnerable to a fall in asset prices.

Credit tightening and more properties hitting the market may mean we start seeing an excess in property supply.

SQM Research is forecasting property prices to fall by as much as 4% in Sydney and 3% in Melbourne. In fact, as they say, they calculate the Sydney market is 45% overvalued.

An increase on interest rates, unemployment…or even a further closing of the credit tap could hit the market even more.

Consumers may finally have to face the fact that the ‘pay later’ time is now.


Selva Freigedo,
Editor, Markets & Money

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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