Oh my, somethings just never seem to go away.
Is it just because we have been fudging our way for aeons, or is it because with the leader of the new world won his position by warped truth and factual distortion that it’s now fashionable; this belief that it’s now totally cool to lie, cheat and deceive.
I still shudder when I look back at the GFC, an event mostly set off by the repackaging of subprime mortgages market in the US, compounded by banker greed and excessive risk taking. One wonders have we ever learned our lesson?
Is it because of this that we somehow our DNA has picked up in the same willingness to win at all cost, albeit usually to others? How long can we get away with all these little fudges? Do we keep pushing till one cataclysmic event tears the fabric from society and leaves us counting the cost again?
In my last muse I touched on areas where the median household income doesn’t support the median house price, which lead me to looking at how many home owners actually meet a bank’s mortgage lending criteria, when quite obviously they don’t have the means.
To add to this my news feed is currently bombarded with potentially woeful tales of how our household debt has risen to new highs, with the IMF saying that our household debt is now 100% of GDP as opposed to 63% in other advanced economies. Jeez.
I’m not a good sleeper, I’ve always found it difficult to empty the head of thoughts and usually when I do I find something to fill it up again. What’s really bloody annoying is that it’s usually on the night’s I need the sleep that I don’t. I mean how can a middle-aged man solve the world’s problems lying in bed? And why, why, why do I get these damned thoughts then the lights should be out and my brain relaxing in some otherworldly space?
So last Saturday night in a moment between tossing and turning, when I should have been sleeping to rest for a long and hilly charity bicycle ride I remembered a conversation with a pal from CommSec who highlighted a report from UBS earlier in the year. Thankfully with no laptop at hand it took until Monday to get to their findings as I had enough to think about navigating the hills of the Southern Highlands, joined by a cast of thousands sucking the available oxygen from the fresh country air.
In short after following up on a survey of over a thousand home loan borrowers that it first conducted the previous year, they warned that up to a third of Australian mortgages could be ‘liar loans’ based on factually inaccurate information.
It transpired out that 28% of the people surveyed said their mortgage application was not ‘totally’ factually accurate but ‘mostly’ factually accurate. One in 20 applicants admitted that their loan was only ‘partially’ factually accurate, and then of course there was a further 2% who preferred ‘not to say’, no doubt a little confused and not wanting to get caught out.
Seems 60% these deceiving toerags were on the whole, happy to expose their deception with the areas of accuracy in question being the overstating of their household income and asset values, and the understating of debts and household expenses. The remaining pretenders keeping schtum.
The Australian banking system currently holds around $1.6 Trillion (that’s twelve zeros!) of mortgages and although defaults are currently low one would only need a nasty blip in the market to see these rates rise. If their estimates of about $500bn of these less than accurate loans is correct, then you can imagine the fall out. I doubt very much if their lenders mortgage insurance stretches this far.
Back to the IMF report; based on a study of more than 80 advanced and emerging economies, it seems we are not alone. They also concluded that Canada, Cyprus, Denmark, the Netherlands and Switzerland are also exposed to higher levels of household debt. Indeed globally, the median household debt-to-GDP ratio among emerging market economies increased from 15 per cent in 2008 to 21 per cent in 2016 but when you then look at the advanced economies where the ratio increased from 52 per cent to 63 per cent over the same period the disparity is evident.
Scared yet?
Undoubtedly, the RBA has been using the housing sector as a substitute to disentangle the slowdown in the mining sector, the by-product being increased household debt this coupled with slowing wages growth mean some could struggle to meet their mortgage obligations when interest rates start to rise again, which inevitably they will.
I’m not entirely sold on fear, probably because I try to manage my risks in life especially when it comes to debt and servicing of said debt. Being aware of the potential shortcomings and almighty mess-ups in life is a necessary part of this but let’s face it that’s life. You make one’s bed and lie in it 😉.
Take your loans, then take away your cash and assets (no not including equities or superannuation) and you are left with your net debt which you’d be surprised to hear as a nation has been relatively flat for a decade after peaking in 2006. I remember over the GFC how many used this as a time to get the balance back in their favour.
Whilst I have and will continue to highlight the microcosms in the property landscape that we should all be aware and careful of, it doesn’t sound that bad after all does it?! If your debt is leveraged into good investments, you will be in a great position as most real estate and financial assets have appreciated faster than your debt over the last ten years.
It goes without saying that the banks wouldn’t let anyone have the debt levels they have if they couldn’t service it and let’s not forget whilst Australia hasn’t had the cheapest interest rates in the developed world they have been considerably less than most remember, indeed from what I read I see that the ability to service debt is as good now as it’s ever been in the last 14 years.
The flipside of this is that whilst the banks are happy to lend us money they have one hand hovering over our jugulars and another over our assets, in most cases that being your family home and other property. They hold $1.3 trillion in mortgages with homes making up more than 50% of this. Australia’s total housing mortgage book is worth $1.6 trillion out of housing valued at around $6 trillion.
A simple equation when you look at it, the housing market would have to crash by 40% for the banks to lose and to lose this much the whole economy would have to be down the gurgler. You me, everyone..
APRA restrictions and the rise in bank costs have seen interest rates rise specifically on interest only loans. Rather than bemoan the fact I find that the investors we deal with realise and appreciate that this is the market we are in and make suitable allowances. Educated and informed they plan accordingly and the addition of an offset account has helped provide a cost-effective mechanism for a buffer, the reality is those paying interest only are only too aware of the safety this can and will provide moving forward and contribute against their debt accordingly.
Take a deep breath everyone; there’s also some $2.3 trillion worth of superannuation making Australia the 4th largest holder of pension fund assets in the world after the US, UK and Japan, who combined account for more than 81% of total assets.
For those of you who are pondering sadly why you’ve missed the boat, may I humbly suggest you only use bona fide research based advisories when making financial decisions. But you know that now don’t you?
They’ve made their bed, you better lie in it.