Tag: Household Finances

How Resilient Will Consumption Growth Be If Income Growth Stays Weak?

RBA Assistant Governor (Economic) Luci Ellis spoke at the ABE Conference “Three Questions About the Outlook“.

The section on the impact of weak income growth is significant, because it examines why households are under financial pressure, and the impact of this.  She says “continued weak income growth presents a particular risk to the consumption outlook in the context of high household indebtedness”.

One aspect of recent developments where Australia’s experience differs, though, relates to household income and consumption. As we discussed in the Statement, consumption growth in the major advanced economies has been quite robust, supported by strong growth in employment. In Australia, we’ve also had especially strong employment growth over the past year – more than double the rate of growth in the working-age population. But that hasn’t translated into strong consumption growth. Household income growth has been weak for a number of years, and that has weighed on consumption growth (Graph 4). Consumption growth hasn’t slowed as much as income growth. This is what you’d expect, given that households generally try to smooth their consumption through episodes of income volatility. But there’s a real question of how long that could continue if income growth stays weak. This clearly has implications for how we think about the risks to our consumption forecasts.

Graph 4
Graph 4: Household Consumption and Income

 

The weakness in incomes goes beyond the downward pressure on wage growth that I’ve already spoken about. Yes, growth in the wage price index (WPI) has stepped down. But the WPI captures a fixed pool of jobs. It abstracts from compositional change. Average earnings as measured in the national accounts have been even weaker than the WPI (Graph 5). This has not occurred because workers shifted between industries; it is also seen within industries. It might be partly driven by the end of the mining investment boom, as workers moved out of mining-related work, including in the construction and business services industries. But it seems to have been broader than that. Our central forecast is that this weakness will end as the drag from the end of the boom dissipates and spare capacity is absorbed, such that average earnings growth recovers. There is no guarantee of this, though, and therein lies the risk.

Graph 5
Graph 5: WPI and AENA by Sector

 

The living cost pressures that many households feel have therefore been an income story, not a price inflation story. Although utilities prices did increase significantly in some states in recent quarters, much of households’ regular spending has seen relatively little in the way of price increases for a number of years.

Weak income growth can run below consumption growth for a time, but not forever. If households start to see this weakness in income growth as permanent, they are likely to change their spending patterns in response. We might be seeing this in the details of the consumption figures: growth in spending on discretionary items, like travel and eating out, has slowed while growth in spending on essentials has held up (Graph 6).

Graph 6
Graph 6: Household Consumption

 

Continued weak income growth presents a particular risk to the consumption outlook in the context of high household indebtedness. Households do not just wake up one day and collectively decide to pay down their debt. But if incomes turn out weaker than they expect, or some other adverse news should arise, the households carrying the most debt might feel they have to rein in their spending quite a bit.

 

Financial Stress is Increasing in Australia as Cost of Living Pressures Mount

After the ME Bank Survey, and our Household Finance Confidence Index both showed the financial pain many households are in; now National Australia Bank’s (NAB) latest Consumer Behaviour Survey, shows the degree of anxiety being caused by not only cost of living pressures but also health, job security, retirement funding as well as Australian politics.

From NAB and Business Insider.

Of all the things bothering Australian households in early 2018, nothing surpasses cost of living pressures.

Source: NAB

From the National Australia Bank’s (NAB) latest Consumer Behaviour Survey, it shows the degree of anxiety being caused by not only cost of living pressures but also health, job security, retirement funding as well as Australian politics.

The higher the reading, the more anxious it is making Australians.

Somewhat surprisingly, it was not the gaggle in Canberra that caused the most anxiety for households in the latest survey, but rather persistent concerns surrounding living expenses.

“[The index] was basically unchanged in Q4 2017 at near survey lows with job security causing Australians the least stress, consistent with a strongly improving labour market,” said Alan Oster, NAB Group Chief Economist.

“That said, the cost of living is still weighing most heavily on them, highlighting the disconnect between low levels of economy-wide inflation and consumer focused costs.”

That was reflected in the detail of the latest survey, revealing some alarming statistics as to just how many Australians are struggling at present.

It found around two in five Australians suffered some form of financial hardship over the survey period, especially among lower-income earners.

Over 50% of low income earners reported some form of hardship, with almost one in two 18 to 49-year-olds being effected.

As seen in the chart below, after a steady improvement in late 2016 and early 2017, those reporting financial hardship have increased in recent quarters, coinciding with steep increases in gas and electricity charges for many Australian households.

Source: NAB

“Being unable to pay a bill was the most common cause,” the NAB said, adding this came in at over 20%.

“Not having enough for food and basic necessities was next, impacting one in three low income earners.”

Some 18% of respondents reported not having enough for food and basic necessities in the latest survey.

Source: NAB

Nearly half of those consumers also reported they were “extremely” concerned about their current financial position, nominating paying their utility bills as the biggest impact on their financial position.

Source: NAB

“While consumers told us they were a little less concerned about their household’s current financial position in Q4, being unable to pay a bill — particularly utilities — continues to have by far the biggest impact on those households most concerned about their finances,” Oster said.

With cost of living pressures still creating anxiety among households, the NAB asked respondents how much extra income they would need to alleviate those concerns.

In short, a lot, especially for those in the big capital cities and households with children.

“On average, consumers told us they need an extra $207 a week – or $10,764 per year,” Oster said, adding that “this varied according to where we live, our income, gender and family status”.

“It ranged from $221 in New South Wales and the ACT to $132 in Tasmania, and from $214 in capital cities to $186 in rural areas.

“Consumers with children need $258 and those without $191”.

Source: NAB

 

While Oster admits that how consumers “feel” doesn’t necessarily correlate with how they really spend, it underlines the point that many Australians think they’re getting squeezed financially.

If it wasn’t already apparent, this likely ensure the next federal election campaign will be centred around alleviating the perceived cost of living pressures facing many Australian households.

Dick Smith on Australian Debt

Dick Smith Fair Go (DSFG) has published a paper on Australian Debt, written in an easy to read form – Australia’s Debt: an Honest Debate.”

The document walks through the various types of debt, and homes in on household debt as the biggest risk to our economic future, despite the political football that public debt has become. They discuss high household debt levels, the inflated housing sector, banks which are too big to fail and the risks from interest rate rises. All themes which those who follow the DFA blog will find only too familiar.

There are plenty of people who’ve bought into the frenzy, borrowed to the hilt, and given themselves little room to move in the event of a rise in interest rates.

In the 1990s when mortgage interest rates peaked at 17%, lots of typical Australians lost everything.  It could happen again, and interest rates don’t need to go anywhere near as high to start causing financial strife.

Work by the Grattan Institute shows that if interest rates went up just 2 percentage points, stress levels would be the highest on record but for that 1990s 17% squeeze.

If this were to happen while wages growth remains as flat as it’s been, borrowers might not be able to afford their loan repayments. When this happens en-mass it puts our banks in dire straits.

Higher loan costs would lead to less spending, which would affect employment rates, hit the government’s budget, and plunge us into a recession.

The paper also makes the link to high migration.

There is one final aspect of Australia’s debt debate that is rarely discussed and not widely understood: the link between the federal government’s 200,000 strong ‘Big Australia’ immigration program and private debt.

The lion’s share of Australia’s export revenue comes from commodities and from Western Australia and Queensland. But the majority of Australia’s imports and indeed private debt flows to our biggest states (and cities), New South Wales (Sydney) and Victoria (Melbourne). Sydney and Melbourne also happen to be the key magnets for migrants.

Increasing the number of people via mass immigration does not materially boost Australia’s exports but does significantly increase imports (think flat screen TVs, imported cars, etc). These imports must be paid for – either by accumulating foreign debt, or by selling-off the nation’s assets. We’ve been doing both.

So basically high immigration is affecting the trade balance via more people coming in each year (mostly to Sydney and Melbourne) because of the additional imports purchased, as well as driving Australia’s external vulnerability via the build-up in non-productive private debt.

And ends in a simple conclusion:

After the claims propagated by the Howard debt truck of 1996, the county’s debt load is now the highest it has ever been.

When they are in opposition the major political parties are keen to simplify and weaponise the idea of debt in the political battle against their opponents – but when they’re in power there’s suddenly a difference between good debt and bad debt.

While it may be more politically astute to focus on the government debt (because they can more easily blame their opponents for it), it will be better for the country if the Australian people, the voters, are informed that it’s private and household debt that is most likely going to cause major problems in the future and that our record high immigration-fuelled population growth is making the problem worse.

To put it simply, we need to live within our means!

 

 

Irresponsible Mortgage Lending A Significant Risk For Seniors

From NestEgg.com.au

Surging property prices in Australia’s capital cities can be attributed to irresponsible lending, but it’s not just young buyers suffering the consequences, a consumer organisation has said.

In its submission to the royal commission into Misconduct in the Banking, Superannuation and Finance sector, the not-for-profit consumer organisation, the Consumer Action Law Centre (CALC) said the number of Aussie households facing mortgage stress has “soared” nearly 20 per cent in the last six months, and argued that lenders are to blame.

Referencing Digital Finance Analytics’ prediction that homes facing mortgage stress will top 1 million by 2019, CALC said older Australians are at particular risk.

The organisation explained: “Irresponsible mortgage lending can have severe consequences, including the loss of the security of a home.

“Consumer Action’s experience is that older people are at significant risk, particularly where they agree to mortgage or refinance their home for the benefit of third parties. This can be family members or someone who holds their trust.”

Continuing, CALC said a “common situation” features adult children persuading an older relative to enter into a loan contract as the borrower, assuring them that they will execute all the repayments.

“[However] the lack of appropriate inquiries into the suitability of a loan only comes to light when the adult child defaults on loan repayments and the bank commences proceedings for possession of the loan in order to discharge the debt,” CALC said.

The centre referred to a Financial Ombudsman Service (FOS) case study in which retiree and pensioner, Anne, entered into a loan contract with her son Brian. The repayments were to be made out of Brian’s salary and Anne’s pension. The loan was requested in order to extend her home so that Brian could live with her.

Following loan approval, the lender provided more advances under the loan contract. The advances were used to pay off Brian’s credit debt and buy a car.

When Brian left his job to travel, Anne could no longer afford the repayments and the lender said it would repossess her home.

“Anne lodged a dispute with FOS. After considering the dispute, FOS concluded that Anne was appropriately a co-debtor in the original loan contract, as she had received a direct benefit from the loan (the extension to her home and therefore an increase in its value),” CALC said.

“However, FOS considered that she was not liable for the further advances as she did not directly benefit from the application of the funds. Even though the repayment of Brian’s credit card debts may have provided more towards the household income, FOS concluded that this was not a direct benefit to Anne.

“Neither was the purchase of a car for Brian, as there was no information to show that Anne used the car or relied on Brian to transport her.”

CALC also expressed concern that the Household Expenditure Measure (HEM) is not a robust enough living expense test.

Noting that the Australian Prudential Regulation Authority shares their concern, the centre said the reliance on the HEM test raises concerns about the robustness of the actual measure.

“APRA states that it has concerns about whether these benchmarks provide realistic assessments of a borrower’s living expenses.

“In the same vein, ASIC has issued proceedings against Westpac in the Federal Court for failing to properly assess whether borrowers could meet repayment obligations, due to the use of benchmarks rather than the actual expenses declared by borrowers.”

CALC warned that over-indebtedness has ramifications for the economy but also for individuals and families.

Highlighting the link between high levels of debt and lower standards of living, CALC said it can have significant long-term effects as well, with the capacity to damage housing, health, education and retirement prospects

Do Households Budget?

Recent research by AMP has found three quarters of Australians will be starting the year without a defined and specified budget, which will make sticking to our new financial goals tricky.

Whilst around half of households do some rough calculations, one fifth do not track spending at all, and this is true across all age bands and states.  Our own surveys suggest that half of all mortgage holders do not budget effectively.

Michael Christofides, Director of Retail Solutions at AMP Bank, said the findings are worrying as budgeting is a critical part to achieving financial security.

“Knowing what you earn, owe and spend gives your greater control over your money and lets you quickly identify areas where you could be saving.

“The problem is that many people mistakenly think they are too busy to budget.

“But perhaps this is because many of us are still using back of the envelope and time-consuming techniques to try and track our finances.”

According to AMP’s research, over a third of Aussies (34 per cent) believe budgeting is too much effort and almost one in five Aussies (19 per cent) say budgeting takes too much time.Even if we do start off the year with good intentions – sitting down and creating an initial budget – over a quarter (27 per cent) of us won’t end up sticking to it.

The research also showed that regularly checking our bank accounts (47 per cent), paper (28 per cent) and excel (20 per cent) were the main ways we keep track of our budgets.

Mr Christofides said, “In this era of smart banking applications, Aussies don’t need to be spending time hunched over an excel spreadsheet – not when an application or smart bank account can do all the work for you with far greater accuracy, giving you far greater control.”

So maybe this year, if we are to meet our financial New Year’s resolutions, we should look to use technology to help us. Not only will it take away the time and effort of budgeting, it will help us to achieve our financial goals and resolutions in 2018.

Softer property could weaken Aussie equities

From InvestorDaily.

Although global equity markets are looking strong for 2018, local equities may be hurt by troughs in the domestic property market, says Tribeca Investment Partners.

According to Tribeca Investment Partners portfolio manager Sean Fenton, there is mounting evidence that the Australian housing cycle has already reached its peak, further reinforced by APRA’s efforts in curbing mortgage lending.

“A heavily indebted household sector that is experiencing flat to negative real income growth, as well as dealing with higher energy and healthcare costs, and which has drawn down its savings rate, is unlikely to fill the gap in growth,” Mr Fenton said.

“Further downside risk to the economy may emerge if the current tightening in mortgage lending standards pushes house prices lower and generates negative equity effects.”

With global markets encouraged by “easy monetary conditions”, central banks would be unwilling to make any sudden moves and lower the interest rate too quickly, “particularly as inflation has remained quiescent”.

“This provides fertile ground for equity markets to rally, but also creates an environment of heightened risk as areas of stretched valuation become more apparent,” Mr Fenton said.

Tribeca would continue to underweight sectors sensitive to the interest rate as well as increase its underweight to the building materials, retail and property development sectors.

“Domestically, we are positioned more defensively in gaming, select industrials and a small overweight to banks,” Mr Fenton added.

RBA Charts Tell A Tale Of Household Woe

The latest RBA chart pack, a distillation of data to the end of the year, contains a few gems, which underscore some of the tensions in the consumer sector.

First, relative the the ultra-low cash rate, actual mortgage rates are rising – no surprise given the rise in mortgage stress we are registering.

Next, home loan approvals are on the slide – expect more of this as tighter underwriting standards bite, and many interest only borrowers are forced to switch to higher cost interest and principal loans.

Home price indices are trending lower (but still net positive growth overall at the moment). Expect more falls in the months ahead.

Household debt continues higher. Now double disposable income, and we have some of the most highly in debt households in the world. Lending growth is still three times income, so this is likely to continue higher.

All this is bearing down on household consumption as real income growth stalls. The savings ratio is falling, as households tap these to prop up their finances, OK in the short term, but unsustainable longer term.

More Evidence of Poor Mortgage Lending Practice

The Australian Financial Review is reporting that New ‘liar loans’ data reveal borrowers more stretched than some lenders suspect.

One in five property borrowers are exaggerating their income and nearly half understating their spending, triggering new concerns about underwriting standards and vulnerability to sharp economic corrections, according to new analysis of loan applications by online property lender Tic:Toc Home Loans.

The number of ‘liar loans’ exceeds original estimates by investment bank UBS that last year found about 30 per cent of home loans, or $500 billion worth of loans could be affected.

Tic:Toc Home Loans’ founder and chief executive, Anthony Baum, said loan applications are representative of larger lenders in terms of location, borrower and loan size, which range from about $60,000 to $1.3 million.

Mr Baum, a senior banker for nearly 30 years, said in many cases applicants did not have to over-state their income for the required loan.

“Our portfolio looks like other organisations,” he said.

Analysis of their applications reveals about 20 per cent overstate their income, typically by about 30 per cent, and 50 per cent state their expenses are lower than the Household Expenditure Measure, also by about 30 per cent.

Property market experts claim the latest analysis, although based on a smaller sample than UBS’s survey, are credible and consistent with independent analysis of the lending standards.

“They do not surprise me,” said Richard Holden, professor economics at University of NSW Business School, who argues the potential problems are compounded by more than one-in-three loans being interest only.

Martin North, principal of Digital Finance Analytics, an independent consultancy, also backed the latest ‘liar loan’ numbers.

Mr North said standards had slipped because of lenders’ readiness to “jump over backwards” to increase business and commission incentives for mortgage brokers rewarding bigger loans.

“Not all lenders are the same but these numbers do not surprise me at all,” he said.

Mr North said there was strong evidence that salaries are overstated by between 15 and 20 per cent by borrowers using a range of tactics, such as over-stating bonuses or, for variable income earners, using peak rather than average income.

Household Financial Confidence Trudges South In December

The latest edition of the Digital Finance Analytics Household Financial Security Confidence Index, to December 2017 shows another fall, down from 96.1 last month to 95.7 this time, and remains below the neutral measure of 100.

The trend continues to drift south as flat incomes, big debt and now falling home prices all impact.

Analysis of households by their property owning status reveals that property investors are in particular turning sour, as flat net rental incomes, and rising interest rates hit many, at a time when property capital growth is stalling. Owner occupied households are faring a little better, thanks to a range of ultra cheap mortgage rates on offer at the moment, but they are also concerned about price momentum. Those without property interests remain the least confident, as the costs of renting outstrip income growth, and more are slipping into rental stress.

Looking across the states, they all slipped a little, with NSW now well behind VIC (we think the Victorian market is about 6 months behind Sydney, so will drift lower ahead). WA has not improved this time, suggesting that those talking up the market in the west may be over optimistic.

Across the age groups, young households are most concerned about their financial position, but every age group shows a small fall this month – perhaps thanks to the Christmas binge (though we think credit card debt will not rise that much this year) and retail stats may be lower than expected.

Looking in detail at the scorecard, which shows the elements which drive the index; job security is pretty stable, but savings are being raided by many to support their finances, while rates on bank deposits continue to drift lower.  Households are becoming increasingly uncomfortable with the level of debt they hold (they should at a ratio of 2:1, debt to income). Income continues to fall in real terms and costs of living are rising (child care costs and rising fuel costs are concerning many).  We also see a slide in net worth, as home prices, especially in the Sydney region decline. This despite high stock market prices at the moment.

We cannot see any circuit breakers in the mix ahead, so we expect the falling trend to continue into autumn.

By way of background, these results are derived from our household surveys, averaged across Australia. We have 52,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

We will update the results again next month.

The Shape of 2018 – The Property Imperative Weekly 30th Dec 2017

In the final edition of the Property Imperative Weekly for 2017, we look ahead to 2018 and discuss the future trajectory of the property market, the shape of the mortgage industry, the evolution of banking and the likely state of household finances.

Watch the video, or read the transcript.

We start with the state of household finances. The latest data from the RBA shows that the ratio of debt to income deteriorated again (no surprise given the 6%+ growth in mortgage debt, and the ~2% income growth). The ratio of total debt to income is now an astronomical 199.7, and housing debt 137.5. Both are at all-time records, and underscores the deep problem we have with high debt.

We think that households will remain under significant debt pressure next year, and the latest data shows that mortgage lending is still growing at 3 times income growth. We doubt that incomes will rise any time soon, and so 2018 will be a year of rising debt, and as a result, more households will get into difficulty and mortgage stress will continue to climb.  We think Treasury forecasts of rising household incomes are overblown. On the other hand, the costs of living will rise fast.

As a result, two things will happen. The first is that mortgage default rates are likely to rise (at current rock bottom interest rates, defaults should be lower), and if rates rise then default rates will climb further. The second outcome is that households will spend less and hunker down. As the Fed showed this week, the US economy is highly dependent on continued household spending to sustain economic growth – and the same is true here. We think many households will hold back on consumption, spending less on discretionary items and luxuries, and so this will be a brake on economic activity. This will have a strong negative influence on future economic growth, which we already saw throughout the Christmas shopping season.

Mortgage interest rates are likely to rise as international markets follow the US higher, lifting bank funding costs. This is separate from any change to the cash rate. This year the RBA was able to sit on its hands as the banks did their rate rises for them. We hold the view that the cash rate will remain stuck it its current rut for the next few months, because the regulators are acutely aware of the impact on households if they were to lift. They have little left in the tank if economic indicators weaken, and the bias will be upward, later in the year.

Competition for new loans will be strong, as banks need mortgages to support their shareholder returns. The latest credit data from the RBA showed that total mortgages are now at a record $1.71 trillion, and investor lending has fallen to an annual rate of 6.5%, compared with owner occupied lending at 6.3%, so total housing lending grew at 6.4%. Business lending is lower, at 4.7% and personal lending down 1.2%.

But APRA’s data shows that banks are writing less new business, so total Owner Occupied Balances are $1.041 trillion, up 0.56% in the month (so still well above income growth), while Investment Loans reached $551 billion, up 0.1%. So overall portfolio growth is now at 0.4%, and continues to slow. In fact, comparing the RBA and APRA figures we see the non-bank sector is taking up the slack, and of course they do not have the current regulatory constraints.  The portfolio movements of major lenders show significant variation, with ANZ growing share the most, whilst CBA shrunk their portfolio a little.  Westpac and NAB grew their investment loans more than the others.

We think there will be desperate attempts to attract new borrowers, with deeply discounted rates, yet at the same time mortgage underwriting standards will continue to tighten. We already see the impact of this in our most recent surveys. The analysis of our December 2017 results shows some significant shifts in sentiment –  in summary:

  • First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
  • Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
  • Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate away from property investors.
  • Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, and this could have a profound impact on the market. We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. First time buyers remain the most committed to saving for a deposit, helped by new first owner grants, while those who desire to buy, but cannot are saving less. Those seeking to Trade Up are most positive of future capital growth. Foreign buyers will be less active in 2018.

So our view is that demand for property will ease, and the volume of sales will slide through 2018. As a result, the recent price falls will likely continue, and indeed may accelerate. We will be watching for the second order impacts as investors decide to cut their losses and sell, creating more downward pressure. Remember the Bank of England suggested that in a down turn, Investment Property owners are four times more likely to exit compared with owner occupied borrowers.

So risks in the sector will grow, and bank losses may increase.

More broadly, banks will remain in the cross-hairs though 2018 as the Royal Commission picks over results from their notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards. We expect more issues will surface. The new banking code which was floated before Christmas is not bad, but is really still setting a low bar and contains elements which most customers would already expect to see. This is not some radical new plan to improve customer experience, rather more recognition of the gap between bank behaviour and customer expectation. And it does not HAVE to be implemented by the banks anyway.

There is much more work to do. For example, how about proactive suggestions to switch to lower rate loans and better rates on deposits?  What about the preservation of branch and ATM access? What about the full disclosure of all fees relating to potential loans?  And SME’s continue to get a raw deal thanks to lending policy and bank practice (despite the hype).

Then the biggie is mortgage lending policy, where banks current underwriting standards are set to protect the bank from potential loss, rather than customers from over-committing.

We will get to hear about the approach to Open Banking, the Productivity Commission on vertical integration and the ACCC on mortgage pricing, as well as the outcomes from a range of court cases involving poor banking behaviour. APRA will also discuss mortgage risk weights. So 2018 looks like adding more pressure on the banks.

So in summary, we think we will see more of the same, with pressure on households, pressure on banks, and a sliding housing market. Despite this, credit is growing at dangerous levels and regulators will need to tighten further.  We are not sure they will, but then the current issues we face have been created by years of poor policy.

Households can help to manage their financials by building a budget to identify their commitments and cash flows. Prospective mortgage borrowers should run their own numbers at 3% above current rates, and not rely on the banks assessment of their ability to repay – remember banks are primarily concerned with their risk of loss, not household budgets or financial sustainability per se. Regulators have a lot more to do here in our view.

Many will choose to spruke property in 2018 (we are already seeing claims that the Perth market “is turning”), and the construction sector, real estate firms, and banks all have a vested interest in keeping the ball in the air for as long as possible. Governments also do not want to see prices fall on their watch, and many of the states are totally reliant on income from stamp duty.  But we have to look beyond this. If we are very luck, then prices will just drift lower; but it could turn into a rout quite easily, and don’t think the authorities have the ability to calibrate or correct a fall if it goes, they do not.

The bottom line is this. Think of property as a place to live, not an investment play. Do that, and suddenly things can get a whole lot more sensible.

That’s the Property Imperative Weekly to 30th December 2017. We will return in the new year with a fresh weekly set of objective news, analysis and opinion. If you found this useful, do leave a comment, or like the post, and subscribe to receive future updates.  Best wishes for 2018, and many thanks for watching.