The ‘Pay Later’ Effect

australian economy credit crisis

From Bloomberg yesterday, in an article titled ‘In the world’s most liveable city, hardly anyone can afford to buy a home’:

Home ownership among young Australians has fallen to the lowest level on record, as an explosive property boom squeezes out all but the wealthiest.

Bloomberg is referring to Melbourne; the city is currently ranked as the world’s sixth most expensive to live in. But it’s also referring to Australia as a whole, where home ownership is falling, with only 45% of people aged 25 to 34 owning their homes.

The generation that I’m sure historians will label as the one that chose smashed avo on toast over home ownership…

Bloomberg suggests that low interest rates, supply failing to keep up with demand, and a tax system that favours property investors are major contributors in explaining why the young are struggling to afford a house.

All these factors have pushed house prices beyond the reach of many, as illustrated in the chart below:

Out of reach


Source: Bloomberg
[Click to enlarge]

Bloomberg also points out that once Australia’s capital gains tax was halved for property investors, the market became turbocharged, with housing prices seen as a ‘one-way bet’.

The graph on the right in the chart above demonstrates that home ownership among young Aussies began falling almost two decades before the financial crisis.

The graph on the left, meanwhile, shows Australia’s rapidly rising property prices (red line) compared to wage growth (black line) over the same period.

This picture tells you what you already know: Wage growth isn’t keeping up with property prices. Homes are increasing in value too quickly for people’s wages to make them affordable.

Yet, as problematic as this might be, it could get a lot worse before it improves.

Cycles, Trends and Forecasts editor Phil Anderson, who suggests that property markets move in identifiable steps, says that we are only half-way through the current real estate cycle. Meaning that housing affordability is likely to worsen for many years yet.

While rampant house prices may be part of the cycle, paltry wage growth of 1.9% a year is holding back Aussies from increasing consumption. Paul Dales, chief Australia & New Zealand Economist at Capital Economics, said yesterday:

More money going on servicing a mortgage means there is less to spend elsewhere, dragging on economic growth. It won’t take many rate rises for indicators to start flashing amber and red for more indebted households.

Consumption is, of course, a very important driver of the Australian economy.

In our service-based economy, consumption accounts for 60% of gross domestic product.

Which is odd. Mainstream column inches regularly blast youths of today for going out and frittering away their money.

Yet if people didn’t get out and eat at restaurants, or spend money in shops and entertainment venues, our Australian economy would slowly decline anyway. Then we’d have homeless and unemployed people.

Like it or lump it, even during the mining boom, Australia was still a consumption-driven economy. And when consumption stalls — such as high household debt preventing people from spending money elsewhere in the economy — economic growth stalls as well. 

However, that may be put off for a little longer. Most people are keen to shun credit cards, but we still live in a world of instant gratification. Financial technology, or FinTech, is currently disrupting the traditional credit card consumption model, and possibly propping up the retail sector at the same time.

Afterpay Touch Group [ASX:APT] is one such FinTech company leading the charge in this space. The idea is simple: Take the old concept of ‘layby’ (paying small amounts over a set timeframe before purchasing) and add instant gratification.

Using Afterpay and other services like it, rather than buying an item through layby, people who sign up to AfterPay can take their items home immediately. They then get the chance to pay it off over the next eight weeks. It’s like using a credit card, but without the bank’s money.

In saying that, how Afterpay works will be interesting in terms of what effect it has on data.

You see, Afterpay — and other providers like it — don’t provide bank loans, or lines of credit.

The company states that it may conduct a credit check. However, because it’s not bank credit, money spent through Afterpay isn’t counted as credit by the Reserve Bank of Australia.

Which is interesting. This means that people in Australia will technically be supporting higher consumption figures without it showing up as increasing debt levels. What it will do, though, is reduce the Australian savings rate further.

‘Buy now and pay later’ services roughly account for 10% of discretionary purchases. So the impact for now is minimal.

However, if wage growth continues to slow, and daily living costs continue to rise, Afterpay will become a key player in supporting discretionary spending — and the Australian economy.

Kind regards,

Shae Russell,
Editor, Markets & Money

PS: While ‘buy now pay later’ programs can cause problems for some consumers, disruptive FinTech companies will eventually become a vital part of our financial system.

Australian Small-Cap Investigator editor Sam Volkering saw the potential in this space early. He was quick to enter the FinTech space a couple of years ago. In fact, he has three FinTech stocks in his portfolio, all of which are up since recommendation. One is up 62% in the last year. For all the details, click here.

Shae Russell

Shae Russell

Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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