Australians’ private debt has soared to 187 per cent of their income. Debt is up from about 70 per cent in the early 1990s.

by Mish

The jobless rate rose for the second straight month in December to 5.8 per cent, and underemployment, the number of workers wanting more hours, is near an all-time high. Wage growth is the lowest on record.

Australia has one of the world’s biggest property bubbles. In some sections of the country, prices are already under severe price pressure. The entire country will soon face that problem, at least in my opinion,

The Financial Review reports There’s $1 trillion of Australian Mortgages and Some Now Worry of What’s Next

The Reserve Bank of Australia frequently seeks feedback on the health of the economy. It might want to call the debt counsellors soon.

Homeowners, consumers and property investors around Australia are making more calls to financial helplines as three warning signs back up the spike in demand: mortgage arrears are creeping up, lenders’ bad debt provisions have increased and personal insolvencies are near an all-time high.

“It’s 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.”

Australia’s households are among the world’s most-indebted after bingeing on more than $1 trillion of mortgages amid a housing boom that’s fizzled out in parts of the country, but still roaring in Sydney and Melbourne.

RBA governor Philip Lowe places financial stability at the forefront of monetary policy.

The concerns are understandable. Australians’ private debt has soared to 187 per cent of their income, from about 70 per cent in the early 1990s, encouraged by low interest rates. In a November speech, Lowe said that while most households are managing these levels of debt, many feel they are closer to their borrowing capacity than they once were.

Knocking out the wind

“There’s so much household debt that a couple of rate hikes here would completely knock the wind out of the housing market, and a lot of people would be impacted by it,” said Gareth Aird, economist at Commonwealth Bank of Australia, the nation’s largest lender. That’s partly why he doesn’t think the RBA will lift rates until 2018 at the earliest.

Lenders are watching these indicators as closely as the RBA. After a seven year bull-run, annual cash earnings at Australia’s big four banks fell last year for the first time since the financial crisis, said PricewaterhouseCoopers. At the same time, their bad debt expenses – which encompass both business and consumer lending – jumped 39 per cent to $5.1 billion, the highest since 2012.

But the hardest indicator to track may be borrowers worried about making their next repayment. Counsellors at the National Debt Helpline deal with such problems and are now even getting calls from property investors, said Guthrie. In the last quarter of 2016, phone calls to the service jumped 12 per cent on the previous year to an average 11,079 per month, she said. That’s double the rate of increase of the same period a year earlier.

Time to panic?

It’s not time to panic. Banks’ losses still remain small by historical standards and are largely confined to mining areas, according to PwC. Some 77 per cent of customers at Commonwealth Bank were ahead on their mortgage payments as at June; the lender is likely to update those figures next week. The RBA also noted in November that borrowers have set aside funds tied to their mortgages equivalent to 17 per cent of outstanding balances.

Key Phrase: “Not Time To Panic”

The #1 rule of panic is simple: Panic before everyone else does.

Those thinking of buying a house in Australia now are out of their freaking minds. Yes, I have been saying this for quite some time. And many can point to profits. But those profits are all on paper. Try selling. It’s impossible for everyone to cash out.

Those who place their homes on the market now, with aggressive below-market pricing, will likely be able to find suckers. Those who think it’s too early to panic will likely to be trapped down the road.

Home are illiquid. It’s seldom too early to panic.

When selling real estate, it’s a catastrophe to panic after the panic has already started.

Mike “Mish” Shedlock