Family Finances are being Stretched
Posted on 26. Jun, 2007 by Chris Lang in Economic Issues, Interest Rates, Using Debt, Your Exposure
With house prices solid or rising everywhere except in Sydney, household debt is now almost out of control.
In the late 1980s and early 1990s, you saw the highly-geared Business sector collapse as interest rates rose. But now, you're finding it is households with the high levels of debt.
In 1990, households had (on average) borrowed only 65% of their disposable income. By 2005, that figure had rocketed to 155% of their annual disposable income. And today, it stands at nearly 170%.
How has this come about?
In dollar terms, these 17 years have seen household debt increase eight-fold ... from $125 billion to about $1 trillion today.
Home Mortgage rates in the 1980s peaked at 18% pa. But, as they gradually declined to around 5.5% in 2005, what you saw was people simply borrowing more — rather than relishing the chance to actually boost their savings.
Therefore, as home mortgage rates have quietly risen to their current level of 7.5% pa ... that has effectively meant a 36% increase in monthly mortgage repayments. To the point where debt servicing now represents about 12% of annual disposable income.
At that level, it is already higher than for the last interest rate peak in the late 1980s — when debt servicing stood at around 10% of annual disposable income.
However, do you realise the really scary part in all this? So far, we haven't yet reached the peak in this interest rate cycle.
Therefore, if you haven't done so already ... make sure you fix your interest rates for the next 3 to 5 years, if at all possible.
That way, you'll at least be able to sleep well at night. And won't put your Investment strategy at risk.
Despite the rising debt levels, Residential prices have continued to increase for several reasons:
1. Interest rates have remained fairly stable and lower for much longer, during what is an historically-long growth cycle;
2. During that time, employment levels have never been higher — so people feel their jobs are secure enough to borrow freely;
3. Several years ago, the Government 1st home-owner subsidies boosted prices at the lower end of the market; and
4. At the higher end of the market, many of these are "ego" purchases — driven by the high salaries and bonuses being delivered through a buoyant economy.
But even if you feel you do have your "debt-servicing liabilities under control" ... I would still fix your interest rate — rather than pay the penalty, as variable rates rise.
According to the IMF we are actually at the bottom of the global interest rate cycle! Worrying stuff not just for the highly indebted households that are funding our consumr driven economies in most states, but more so for the number of highly leveraged private equity which are underpinning our bullish equities market.
If your still sceptical about interst rates being high visit http://www.imf.org/external/pubs/ft/wp/2006/wp0676.pdf
All these factors are lining up for the classic boom bubble bust cycle we know so well.
But surely there is not the same urgency to fix if my debt-servicing liabilities are under control? What evidence is there of a rate-rise 'cycle' continuing? Things seem to be under control right now
Chris - why do you think house prices are rising, when the information above suggests that they shhould in fact be falling?
regards paul