How just 0.04% could effect the Aussie economy

How just 0.04% could effect the Aussie economy

What a way to start the week.

Monday morning, all we could talk about was the doomsday 40% house price crash.

Cue panicked homeowners around the country.

Is this the property crash we’ve been talking about for a decade? Has our lending binge day of reckoning finally come?

Not today, at least.

However, Australia may be forced to face the repercussions of buying a house at any cost.

Here’s why.

I guess it depends on whether you’re the ‘have’ or the ‘have not’.

If you’re like me, and on the hunt for some bricks to call your own, a 40% price crash does sound exciting. Just think of all the properties that would suddenly fall into your price bracket!

The flip side to this is if you’re one of the 69% of Aussies that do own a home – mortgaged or not – you don’t want prices to drop.

No one wants to the see the value of their biggest asset lose almost half its worth.

However, I’m here to pour some cold water on the idea of a 40% house price crash in this decade at least.

The house price value wipe-out – as discussed by 60 Minutes on Sunday night – selectively takes information produced by Data Analytics.

Since the segment aired on Sunday night, Data Analytics founder Martin North has come out and said that 60 Minutes cherry picked the information to suit the story.

North said that a 40% house price fall was a ‘doomsday’ scenario. And furthermore, he put the probability of this happening down to 20%.

But at the same time, North painted a bleak economic picture of if the ‘doomsday’ scenario played out.

If Aussie house prices dropped to almost half of today’s value, North reckons we’d also be looking at unemployment rates of 8.5-9% AND a cash rate from the Reserve Bank of Australia dropped to 0-0.50%.

Again, let’s just point out that this is highly unlikely.

What 60 Minutes left out, North says, is that he shares the consensus view of house prices declining 10-15% Australia-wide over the next two to three years.

Nothing in the kitty

Rather than a house price collapse into 2020, the more moderate 10-15% house fall prediction can still cause massive problems for the Aussies and our economic growth.

For now, the economy is growing.

The most recent gross domestic product said our economy has an annual growth rate of 3.4%. Making the Aussie economy seem in rude good health.

The problem is, the people within the economy aren’t so flush.

We’re spending more and more on what we have to buy rather than what we want to buy.

This means that consumption growth– a key driver of economic growth in Australia – is coming from the essential stuff like food, utilities and insurance costs rather than from the fun things like eating out and buying new shoes.

Spending more money on the necessities is a worry for our future prospects.

The reason for this shift is because our individual financial position is getting worse.

Wage growth is stagnant at 2%.

Furthermore, the data from the Australian Bureau of Statistics showed the ‘total compensation per employee’ – that is, how much wages rose on average per individual to June 2018 – jumped a whole 0.1%.

In other words, nothing.

The same data batch showed that the Australia household savings-to-income ratio declined from 2% to 1%.

Meaning we have nothing in the kitty.

Should Aussies fall on hard times, there’s no safety cushion.

Right now, we are getting by.

However, there’s a chance we are about to be flat-out broke.


We are yet to feel the impact of what a 10-15% house price fall could mean for the Aussie economy.

Putting Australia in a very delicate position.

We barely have a safety net as it is. But if house prices do fall further we still don’t know the effect of interest-only loans reset on the Aussie market.

Mortgages worth more than houses

Back in April this year, the Reserve Bank of Australia (RBA) informed us that some $480 billion in home loans would reset from interest-only to principal and interest.

Meaning that in some cases, home loan repayments could increase by up to 40%.

Just how many of these mortgages would be able to absorb the higher costs remains to be seen.

One estimate suggests that as many as 200,000 people would be in financial stress as this reset takes place. To put this in perspective, that’s 0.04% of people potentially facing financial stress from the loans reset.

A tiny figure, right?

In addition to this, the quick answer to the problem is not to worry; people will just refinance.

Well, that may not work out.

Of the 5 million mortgages in Australia, 1.46 million of them are interest-only.

That’s an awful lot of interest-only loans up for review.

The problem with a simple ‘refinance and move on’ take is that in order to refinance, the house must be worth more than the outstanding loan.

And Australia is currently watching property prices slowly decline.

Already, there have been cases of house valuation coming back as worth less than the mortgage owed.

And over the next four years, there’s no telling how many interest-only loans were created at the top of the housing market.

The falling valuations may very well mean that banks are unwilling to refinance some of these.

Which, in turn, puts additional strain on household income trying to stretch and pay all the bills. If these mortgages suddenly increase in value, spending in the Aussie economy could suddenly drop off. That in itself could trigger a recession.

Right now, we estimate that 0.04% may face financial stress as house prices fall and loans reset.

But that may just be enough to bring the whole economy down.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia