Australians Using Debt to Live Above Means, Invest in Real Estate

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“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.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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6 Comments on "Australians Using Debt to Live Above Means, Invest in Real Estate"

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kage
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Well gee, if you can’t afford to buy something – don’t buy it. I am sick and tired of governments, banks, etc. responding to the ‘affordability crisis’ just because a few gen Xers throw a tantrum. The first home buyers grant needs to be abolished, then there would less fuel for the fire. Knowing government, we will probaby get the exact opposite.

SEAN
Guest

Collectively the entire gang has gone long on mortgage futures.
What the working stiffs clamour for now is a bubble of their own in wages & salaries. Why not, every other smart arse has had one? Labour is the only “asset” to not get a bubble of its own.
Going Keynesian–we owe it to ourselves.
Then the pain would become universal. Top to bottom, and bottom to top. Skyrockets turn to brimstone.
One last bubble, the Grand Hurrah Bubble.

TC
Guest

Might be nice if they also abolised negative gearing so that all those whinging gen X’ers don’t have to subsidise through their taxes the properties they rent but can’t afford to buy.

Alterntaively, why don’t we create another subsidy for first home buyers to claim on their mortgages ?. End result would be we are all equal, but we’ve got another layer of bloody useless government over our heads dishing out the money we pay in taxes.

kage
Guest

TC,
If you are saying boomers are whingers too – I totally agree. I am ashamed of most of my fellow boomers. One of Steve Keen’s ideas is to allow negative gearing on new properties only. Interesting as a stepping stone back to real values. The secondary market would no longer be such a playground for the ‘investors’. Capital would then be directed toward building more houses which would also help to deflate the bubble.

TC
Guest

Yep, agree.

Negative gearing at the moment is driving a speculative outcome. I don’t know of too many investors who are putting their funds into building new houses from scratch to then rent out.

Quarantining it to new homes would produce a productive outcome.

Can’t imagine anyone would be too unhappy about seeing their tax dollars go to people in the construction industry as opposed to estate agents.

Subsidising property construction vs. subsidising property churn is essentially what the argument should be about.

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[…] Sun wrote an interesting post today onHere’s a quick excerpt“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 600000 households, or 8 per cent of the market, were likely to … […]

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