We are heading towards a debt crisis
Australians are headed towards a debt crisis with the current low interest rate and the rising of house prices allowing debt-laden consumers to borrow and ultimately spend more than they can.
Despite interest rates currently sitting at a historic low of two per cent investors still need to exercise caution with unstable Chinese markets and global uncertainty still a looming.
“The continually rising house prices are not doing any good because people aren’t as willing to borrow against rising house prices.” Former chief economist for Merrill Lynch and ANZ Bank, Saul Eslake, said.
“In order to finance other spending in the way that they did before the financial crisis.”
“Most politicians don’t share this view, but it should be considered,” He said.
“Housing prices are now making it increasingly difficult for would-be-first-time buyers to enter the market.”
Investors are returning to the market after a long downturn in the home building sector from the early 2000s.
New South Wales was one of the weakest economies across the nation at that time.
After a change of government in 2012 and low supply of housing across the state, the push for infrastructures was successful leading to a boom.
This is stimulating a housing boom and providing jobs for Australians.
The change has also drawn in domestic and foreign investors via rates offset through negative gearing.
In recent weeks the Chinese market has fallen by 30 percent over the past month.
Eslake warns “If china were to fall into a recession, Chinese investors could pull investments from the housing markets, significantly impacting our economy.”
“Seventy two percent of Australian household debts is owed in the [top] 40 percent of the income distribution,” he said.
“Virtually none is owed by people in the bottom 20 percent.”
However Eslake states “very few Australians would be likely to become forced sellers, in the way that so many Americans did leading up to the Global Financial Crisis.”
Foreign investors are taking advantage of our low interest rates and rapid growth.
It is ‘squeezing’ that investment-class and would-be-home buyers with “demand exceeding supply”, he said.
These factors have become more complicated when the end of the mining boom hit which was the main driver of the Australian economy since 2007.
Despite Western Australia and Queensland continuing to export hundreds of millions of dollars in minerals each year.
The jobs created during the construction of the mines and towns have disappeared and not as readily available.
Mr. Eslake has a few simple guidelines for investors and would-be-home buyers.
“If rates stay at this level for the next three or four years, the risk is that more people will have borrowed more than they should, realistically,” he said.
“While this may boost the economy in the short-term, it would increase the risks when interest rates eventually started to go up.”
“When a bank tells you, you can borrow up to [x amount], at todays interest rate, ask what could you afford to borrow if interest rates were 2% higher and don’t borrow any more than that.”
Morning news break – August 5
