Time to dispel a myth about money.
Money is not the root of all evil. In fact, quite the opposite. Money is the root of all fun stuff. Like boating, travel, ice cream and even buying a house.
The real root of all evil is debt. Debt is evil. But a necessary evil at that. In a perfect world no one would have debt. You would simply work to receive income, and then use the income you’ve got to get the things you can afford at that given time. Simple.
You could buy that boat you wanted. You could travel to new places. You could get that tasty ice cream and not have to whip out ‘plastic fantastic’ to buy it all. Spend the money you have. Save the money you have. Be patient.
But we’re not a patient society. And buying a house with cash today is no easy feat. Because of the necessary evil of debt to buy a house, the Aussie property market is on the verge of utter destruction.
Addicted to ice creams…sorry, I mean debt
But you might also be wondering what the heck ice cream has to do with all this.
Well a trip down to the local ice cream shop last weekend got me thinking.
You see there’s not much better in life than a two scoop, double-choc and strawberry in a waffle cone. And while it might be winter time in the UK, there’s never a bad time for ice cream. NEVER.
Anyway in front of the queue in the shop was a young couple. They ordered two ice creams.
When it came time to pay he whipped out his wallet and one of his cards. It was a Barclaycard card. Very distinctive white with the big ‘Barclaycard’ logo on it.
Barclaycard is a credit card. We all know how credit cards work. But seeing someone pull out a credit card to pay for an ice cream was shocking.
Why on earth would someone take on debt for an ice cream? It simply makes no sense. Even if they pay it off later, they still carry that debt. They still have to pay for it along the line somewhere. But no one really thinks of that, do they?
The world has become so accustomed to debt that we’ll even use it to buy ice cream. It’s a full blown addiction.
This addiction is going to cause serious trouble in the world’s markets. And the next to see this addiction bite hard will be the Aussie property market.
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What will it be like when rates are in double figures?
As reported in the Sydney Morning Herald,
‘“[Debt levels are] steadily out of control — I don’t know of too many financial counselling services where demand doesn’t exceed supply,” said Fiona Guthrie, chief executive officer of Financial Counselling Australia, who says the biggest increase in calls is from people suffering mortgage stress. “There are more people who have got mortgages that they can’t afford to pay.”’
This is an issue that’s been building for some time. Remember, debt is cheap in Australia. With the RBA cash rate still at just 1.5%, we’re seeing retail interest rates at historic lows.
That means every punter in the country can saddle up to a bank and get some debt. Primarily this has been to jump into a property market that’s hyped up on infinitely rising prices.
But in order to get in the door for most properties, punters have been leveraging higher and higher. They get as much debt as they can, because why not?
The fallacy of always rising property prices and the mythical ‘property ladder’ has sucked them into a fools dream. But the RBA, the banks and the economy allows for it.
Well the tide is changing. And it’s going to spell big problems for Australia’s property market.
In August last year I wrote about a situation no one believed. A situation where the banks would raise rates while the RBA cut rates. I don’t think it got much coverage at the time. It seemed like a ridiculous idea.
But we are already seeing the banks raise rates. Their cost of funding is sky high, and they have to raise retail rates to stay profitable.
I was wrong with my estimates that the RBA would cut rates last year. But I still think there’s another cut in there soon.
What does this situation tell us about Australia? Well it means that the RBA has no control over anything. And it means that a heck of a lot of Aussies will get caught up when the bubble bursts.
Even if the RBA continues to hold rates, the banks will continue to push theirs higher. And when the RBA does raise rates, you’ll see the banks’ go up at double the speed.
If Fiona Guthrie says mortgage stress is out of control now, try it on when retail rates are twice as high as they are now. What would mortgage stress look like with rates in double figures? That’s a situation the country could find itself in within the next 18 months.
4,185% rise in evil
Right now Australia’s private debt to GDP is at 222.38% — an all-time high. Consumer credit in Australia is also at $2.571 trillion — another all-time high. In 1980 it was $60 billion. That’s a 4,185% rise in debt — evil — in just 30 years.
Meanwhile, the household savings rate is on a downward slope. It’s now at just 6.3%. In 1980 it was around 17%. Household debt to GDP is at 123%. In 1980 it was just 37.2%.
In the space of 30 years Australia has eaten up debt like a tasty double-choc ice cream.
It’s a serious problem. People are buying more and spending more with money they don’t have. They’re buying up expensive properties in a bizarre, out of control spiral. They’re doing this on a background where retail lending rates could be set to go sky high. Regardless of the RBA’s action, it’s a situation that cannot continue for much longer.
It’s the perfect storm for a huge bubble. And at the root of it all is debt — money you don’t have, which at some point you have to pay back.
Call it a gloomy outlook, but it’s all going to come back to bite the Aussie property market hard. We’ll get a clearer idea this week from the RBA as to their view on the economy. They’ll probably try and talk it up. But don’t be fooled. It’s in a perilous state.
The housing market is reaching a ‘crunch point’ that it won’t be able to come back from. The trigger is going to be higher rates in an economy that continues to struggle. And then even if the economy picks up, it will still push retail rates higher again, causing a double whammy effect.
You simply have to look at your own debt levels and ask yourself, can I sustain this if my rates were doubled? Could I pay the bills then? Could I feed the family then? Or would I be buying ice creams with the credit card?
PS: Speaking of ‘Crunch Points’, there’s another big issue brewing in Australia that the average investor simply isn’t aware of. We’re exporting LNG like crazy — sucking the Surat and Cooper basin dry. It creating an undersupplied market that’s seen the price of gas DOUBLE. It all building up to an incredible ‘Crunch Point’ that’s going to strike the market hard later in 2017 and into 2018.
My esteemed Managing Editor of Money Morning, Greg Canavan has found three stocks that are set to fly because of the coming ‘Crunch Point’. To find out which companies and how they’ll profit from this ‘Crunch Point’, simply head to this link to see more.