Posted: November 27, 2005

Household debt crashes!

According to recent data the household debt binge is starting to unwind. A report in the Sydney Morning Herald on November 26, under the title Mortgage dreams drift off the plan reveals that:

THE number of properties seized and sold by lenders after mortgage defaults is on the rise after more than $60 billion has been slashed from the value of the Sydney property market since the city's house prices peaked two years ago.
As house prices continue to sag following the boom, there is evidence the number of mortgagee sales has increased.

The report interviews a number of real estate agents in Sydney who inidcate that the number of (forced) mortgagee sales had accelerated in the last six months. In terms of residential property valuations, the article says

The Herald used data on the number of residential properties and median house and unit prices to estimate the value of Sydney's 1.7 million dwellings. They reached about $850 billion early last year but had fallen to about $785 billion by the end of September - $60 billion-$65 billion less. The median Sydney house price, calculated by Australian Property Monitors, has fallen by $50,000 to $520,000 since the market peak. And the median unit price is down $24,000 to $357,000. The figures were composition adjusted to balance different sectors of the market. The most expensive 10 per cent of Sydney houses have registered a bigger proportional loss than the average. Their median price is down from $1.38 million to $1.18 million.

The other problem is that negative equity is looming for many as house prices fall. This was a characteristic of Thatcherite Britain as their monetarist experiment unwound. The article quotes a Sydney agent who said:

Look at what people paid two years ago, they paid top dollar for off-the-plan developments and now the market has come down considerably for that type of property ... With one of my past sales in Rose Bay, the owners paid $792,000 and it sold for $720,000.

Other examples drawn from real estate data show a 2 bedroom terrace in Sydney bought for $8.5k two years ago recently sold for $8k. Another 1 bedroom Sydney apartment bought for $5.1k two years ago is in a block where similar properties are going for $4.2k.

So what does this mean? It means that the macroeconomic strategy adopted by the Federal Government, characterised by an obsession with budget surpluses, is now starting to reveal its negative consequences. With households being squeezed by rising petrol prices and other charges on their budgets (rising costs of communications and utilities), those on the margin of solvency are finding it very hard to stay on the right side of that line. It is clear that the economic growth we experienced for much of the second half of the 1990s up until now has been driven in part by the consumer boom (including the real estate and DIY boom). Many households borrowed too much over that period and exposed themselves to the smallest changes in economic conditions. They are clearly over-indebted and are now having trouble meeting repayments.

The Reserve Bank realises that there is an enormous number of households on the verge of bankrupcty due to holding too much debt. That is why they have been cautious with interest rates in recent months. Pity they did not acknowledge the problem as it was building - in earlier Monetary Policy Statements they denied that the household debt issue was problematic despite commentators such as me raising concerns some years ago.

Once the spiral unwinds there will be serial bankruptcies revealed. Then the fiscal drag coming from the Federal Government will also unwind as the economy slows dramatically and unemployment quickly rises. Then the folly of this period of macroeconomic policy making will be difficult for anyone to deny. Then we will have to encourage private saving and public deficits to get the show rolling again. The problem is that unemployment rises quickly and takes years to drop once growth resumes.

Blog entry posted by bill