“Economist Steve Keen warned that mortgage obligations in Australia were set to reach crisis point in less than two years, while a study by JP Morgan found that about 600,000 households, or 8 per cent of the market, were likely to experience at least mild mortgage stress by the end of this year,” writes James McCullough in today’s Courier Mail.
It’s not so much that the American subprime crisis will hit Aussie banks—although that appears to be a possibility in few cases. These things are as never as isolated or “contained” as the authorities would like you to believe. The real problem is that Australians have been using debt to live above their means.
There are several explanations. Maybe it’s because wages haven’t kept up with inflation. Maybe it’s inflation in expectations. With so many visible signs of wealth, the temptation to feel wealthy by surrounding yourself with new things (including a home) is strong, even if you can’t afford them. All you have to do is reach into your back pocket and slap down some plastic. Maybe the entire financial system is rigged to put people in debt and keep them there, making the banks rich.
Whichever explanation you prefer, there are certain realities that don’t change. Homeownership, though a nice national goal, is always a highly individual choice. More importantly, it’s a straight financial decision. It comes down to simple math: can you afford the mortgage payment?
With rising house prices, many people have been seduced into the idea of getting rich quickly through property. But affordability has not really improved. It’s gotten worse, in fact. Only the availability of easy credit has kept people in the game. But this isn’t a game most people should want to play—not that we are in the business of telling people what they should want. Perhaps we should rephrase: accumulating debt to buy assets that fluctuate in market value is a sucker’s game. Most people lose at it.
The Daily Reckoning Australia