The interest rate hold yesterday shows signs of a weak domestic economy, with household debt levels a significant factor. According to CoreLogic, the ratio of household debt to disposable income is at a record high of 186.9 percent. In other words, for every $100 we have to spend (after bills), we are spending $186.90!
At that level, it is clear that Australian families have stopped keeping up with the Joneses and are over-spending to keep up with the Kardashians.
The sense-makers will see at first glance why this is wholly unsustainable, but there is a glaring Hail Mary that is propping up this façade: housing unaffordability. With a dearth of understanding about where that extra $86.90 is coming from to cover the lifestyle-income deficit in Australian households, the only prop for Aussies burrowing deeper into debt is the strength and upward movement of the property market.
It’s a good stall, but it can’t last. The macro-prudential measures implemented by banks to restrict lending leads me to believe that banks and regulators know it, too.
Banking regulations and fiscal responsibility by Australia’s banks and regulators did a great job of insulating our domestic economy from the GFC. The controls on lending limited the exposure and marginal behaviour that tripped up and shorted the US economy, but households bore the brunt of it and they had to compensate. It was a top-down economic crisis.
#SmashedAvo-gate of 2016 was perceived as an intergenerational battle of words holding hipsters accountable to their petitions on housing unaffordability – petitions made in the face of $12 aeropress coffee shots and $27 avocado brunches. On reflection, I think it was a warning. I think #SmashedAvo expressed a knowing that a lifestyle-income deficit has the groundswell potential for a bottom-up economic crisis once a breaking point in the property market is reached.
Is there a breaking point? Affordability factors price out a local market for property and transcend the supply-demand buoyancy that fuels housing growth. The market could soon tell local buyers that they ought to be renting. Again, I think that stricter policy around foreign investment opportunities affirms that this trajectory is anticipated by banks and regulators.
Not incidentally, the mid-year budget from Government shows its cards, in a sense that it anticipates that housing will shrink over the coming quarters. CoreLogic has reported that turnover rates (number of homes selling) are on the decline. Maybe that household disposable income deficit means Aussies don’t have the cash needed to transact. Perhaps the fact that wages are increasing at the slowest rate on record means that the upgraded homes are out of reach.
With such capital growth on record, renovations make good sense but don’t require turnover or expenditure on Stamps and State revenue.
The reality is that cash gives you options and, knowing that Australians are divesting themselves of their cash at a rate of 186.9 percent, it is probably fair to say that Aussies are shorting themselves on their housing options.
Are there signs of a property bubble? Probably not. Are there signs of micro-bubbles in the average Australian household? Effervescently, yes. The upshot of all of this for those with a penchant for prepping is: Time for a U-turn from ‘Champagne Town’ back to the lemonade stand.