All Topics / The Treasure Chest / Skyrocketing Debt

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  • Profile photo of brentbrent
    Participant
    @brent
    Join Date: 2001
    Post Count: 165

    Hi,

    I was reading an article recently which blew my mind. It was only a short article, but it looked at the likelihood of a property crash, and brought it back to whether household debt is sustainable.

    Here’s a choice cutting from the article – the paragraph which blew me away.

    quote:


    Australian household debt is now at $540 billion, and the ratio of household debt to income had doubled to almost 110 per cent in 2003 from 54 per cent in 1993.


    How I read this is that households are spending 10% more than what they earn, and financing it with credit cards, redrawing the equity in their homes, car loans (which are now in line with home loan rates), and other forms of consumer credit.

    It got me thinking, how many times have I heard the words “Two Years Interest Free” lately…

    It also made me think that while I’m living well within my means, saving money and living with no personal debt, there is someone out there who is offsetting what I do and spending well outside of their means.

    If you want to read the article, click here

    Cheers

    Brent Hodgson
    PropertyInvesting.com

    Profile photo of aussierogueaussierogue
    Participant
    @aussierogue
    Join Date: 2003
    Post Count: 983

    thanks brent. it would be great to get everyones view on this. can we keep ignoring the warnings? My fear is that people dont regard property invesment as a ‘market’ – but a entity that always increases.

    does anyone else have serious concerns??

    rgds

    Profile photo of LeighLeigh
    Member
    @leigh
    Join Date: 2003
    Post Count: 130

    Add to this the banks pushing for people to borrow against their equity and also making it easier to qualify for new loans and credit cards and I think we may see a period of high foreclosures.

    Generally though, I can attest to the increase in consumer spending and living on borrowed money amongst younger people. As soon as you’re out of uni and into work the banks are throwing plastic at you. At this age (early 20’s) most people don’t understand the level of debt they’re getting into and look at everything with the view of ‘I’ll be able to pay it back in a few months’. That was before you went and bought a car and all those new clothes as well!


    “All the world’s a stage, and you choose the role you want to play on that stage” William Shakespear


    Profile photo of peterppeterp
    Member
    @peterp
    Join Date: 2003
    Post Count: 307

    An interesting piece Brent. But it poses more questions than it answers, eg:

    1. Why compare debt to income? At first sight a figure of 110% sounds alarming, especially when compared to 54% previously. But isn’t comparing debt with income comparing apples with oranges?

    2. Some more figures would be helpful. The flip side of debt is equity. The difference between the two is net worth. What has happened to people’s net worth (diff between debt and equity) since 1993?

    3. Debt servicing abilty it important. A debt of 100% of annual income sounds scary, but at 6% interest rates, it takes only a small amount out of your pay. Thus serviceability can be manageable, provided interest rates remain low and people keep their jobs.

    4. What is the composition of this debt? If it’s mostly on depreciating items or to live above one’s means, then yes it could be a worry. Debt payments mean that you can’t maintain spending without incurring more debt. Therefore people need to cut back and the macroeconomic effect is a recession! Debt driven consumer binges are therefore not sustainable.

    If the debt was incurred on a cf + property, your income has increased by enough to make up for this, so serviceabilty is actually improved and I have an asset to show for the debt. But if enough people get onto the property bandwagon, so investors dominate the market, property could become more volatile.

    If investors get into shares again, and don’t buy IPs as much as they are now, property prices could fall (assuming stagnant demand from owner occupiers). We have not had this due to immigration, births and the declining household size, but this could happen in the future.

    Investors (esp though who borrowed 90%+) could even face negative equity. Especially in things like tiny student accomodation, some inner-city apartments and country places with zero pop growth that are currently the flavour of the month for cf+ investors (eg Tasmania).

    5. What is living within one’s means?

    For years I gradually built up my investments and borrowed nothing. Then this year I bought an IP (a cheap cf + place with 9% rtn). Serviceabilty is fine as it’s cf +. Though I paid 25% deposit, my debt went from 0 to 200% of annual income. My debt to equity ratio shot up from 0 to 33%. I have a self-imposed limit of 50% (ie to borrow $100k, must have $200k assets) which will allow the purchase of IP #2 shortly.

    By the standards of many on this board, I have taken an extremely conservative approach (you say timid, I say prudent!). I don’t know how my debt:equity ratio stacks up with the Aust average. But by the standards of that report, my level of debt (especially when compared to income) is very high!

    Peter

    Profile photo of StephanieStephanie
    Member
    @stephanie
    Join Date: 2003
    Post Count: 13

    Hi
    Can’t help feeling surprised that alot of people miss the point that the property MARKET is subject to MARKET forces!! Thanks Peter for your contribution. I am also extending my debt in the near future, but with awareness of factors that influence the MARKET and the level to which I am exposed to the market. As a novice investor, new perspectives can be useful. The forum is great.

    Profile photo of scottscott
    Member
    @scott
    Join Date: 2003
    Post Count: 110

    Gday,
    It’s not mentioned in this article but servicability is becoming a problem among borrowers in Australia because most of this debt is being used to fund lifestyle rather than wealth building assets.
    I too had fallen into this trap, but fortunatly woke up before it was too late![:I]
    Now one of my goals is to reduce my personal debt by at least $250 per week, regardless of other needs or wants. So far so good, I usually pay more off.
    Another thing that I do now is only use my credit card when purchasing by phone etc, and only spend an amount that I can pay straight off.
    I’ve also created a strict budget that I follow rigidly it includes saving 10% of my wages. Hopefully all these things will teach me better finacial habits.[8D]

    Cheers,
    Scott S

    “Aim for the stars and you’ll shoot the top of the telegraph pole. Aim for the top of the telegraph pole and you’ll shoot yourself in the foot!”
    -anon

    Profile photo of hwd007hwd007
    Member
    @hwd007
    Join Date: 2002
    Post Count: 247

    I guess if you can service the debt and allow enough fat in your income for adverse circumstances that lie within the predicted range of scenarios, you are at least reducing you exposure to risk. i.e. if they talk of a property market crash in the order of 20% , can you still afford to hold your properties ?

    Interestingly, what effect on rents would this have ? I guess after the crash, eventually they would go lower, with more properties having been sold cheaper and thus new owners demanding less rent income. There would be a delay effect though.

    Profile photo of richmondrichmond
    Participant
    @richmond
    Join Date: 2003
    Post Count: 831

    Hi…

    In terms of viewing IPs as a market, I recently went on a shopping trip and bought a few… I think I did okay, because they were houses weren’t too expensive, for either me to buy or the tenant to rent, they were in good nick, and won’t require too much maintenance. To me the investment decision is quite low risk, and they will be cashflow positive… with locked in interest rates for 4 or so years they are not going to be too much of a financial burden just at the minute…

    What worries me is the people who take the big, thoughtless risk… like buying some of those overpriced apartments at Docklands in Melbourne, many of which are sitting empty, because a lot of people thought it was going to be a great idea… it’s basic oversupply of the market and was always going to be the case! There’s only so much demand to cater at certain prices isn’t there?

    I have always lived within my means, and even though I now have a slowly growing property portfolio, I will always think things through before spending a buck. (There’s a difference between being careful with money, and being a tight a*se! At least, that’s what I reckon!)

    Unfortunately, a lot of my friends who have earned, and are still earning very good money, have very little to show for their efforts, and are going to struggle to get into the game, even if a correction in the market takes place. In Melbourne’s case, I think prices will level off… not fall drastically…

    r

    Profile photo of scottscott
    Member
    @scott
    Join Date: 2003
    Post Count: 110

    Hi all
    Those who have bought in docklands and similar CBD appartment developments in Brisbane and Sydney to a lesser extent, will be in for a rough ride in the near future, in my opinion.
    While this may lower median house prices, I don’t feel that it will affect other sectors of the market too much especially on the cheaper end of the house market.
    A lage number of people having banks foreclose on their PPORs (due to cross colateralisation with IPs) will only strengthen the rental market, and as rental prices are based on demand, not on purchase price this can only serve to increase returns. Not that I can really see this happening in the near future.
    I look upon a market crash as an opportunity to be used to my advantage, not a looming disaster!
    Purchase wisely, with all possibilities in mind and there is little to fear![;)]

    Cheers,
    Scott S

    “Aim for the stars and you’ll shoot the top of the telegraph pole. Aim for the top of the telegraph pole and you’ll shoot yourself in the foot!”
    -anon

    Profile photo of DaveCDaveC
    Member
    @davec
    Join Date: 2003
    Post Count: 79

    My two cents worth.

    I guess if people don’t want to invest for their future, myself and everyone else on this forum will only be too happy to help them when they need vendor finance or even a simple roof over their heads………at least there’s someone out there ready to catch people when they fall off the rails!!!

    Take care
    Dave [:)]

    Profile photo of scratchmescratchme
    Member
    @scratchme
    Join Date: 2002
    Post Count: 56

    I heard on the radio a few months ago that Australians have about $800 billion in superannuation….

    Which is worst !!???!?!![B)][xx(][?][?][?]

    *************
    Australian Property Software
    APIM: http://www.apim.com.au
    APDM: http://www.apim.com.au/apdm.htm
    *************

    Profile photo of DaveCDaveC
    Member
    @davec
    Join Date: 2003
    Post Count: 79

    Hi APIM

    I guess on the face of it this tells me that most Australians are going backwards!!!

    As Steve says, we need to get out there and spread the message of positive cashflow investing. There’s plenty out there for everybody………

    Take care
    Dave [:)]

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