The alarming Census: debt and population

by Crispin Hull on June 30, 2017

ONE OF the most alarming statistics to come out of this week’s release of the 2016 census figures was the dramatic decrease in outright home-ownership over the past quarter century.

It was coupled with a large increase in the portion of people renting – mostly from people who have taken out investment loans.

It bespeaks a gluttonous baby-boomer generation stealing from the next generation, egged on by greedy banks and poor monetary policy, and compounded by cowered do-nothing governments.

The result is that Australia is among the top five nations for household debt – some sources say second only to Switzerland. It stands at between 185 to 200 percent of annual income.

The Census figures tell the story. At the 1991 Census, 41 percent of households owned outright. By 2016 that had fallen to 31 percent – a 10 per centage point drop.

The drop came with falling interest rates and greedy banks pushing mortgage loans. The banks have written more than 830,000 mortgages to people who for the most part did not really need them.

At the same time, the portion of people renting has gone from 27 percent to 31 percent.

Further, the low interest rates have meant that self-funded retirees and those saving for a deposit have received lower returns on their savings.

The aim of the low interest rates was to help businesses, which in turn would keep employment up.

But the unintended consequences were housing bubbles, mainly in Sydney and Melbourne.

We have congratulated ourselves in Australia for avoiding a recession in the wake of the 2008 global financial crisis. But maybe we have just postponed it and created conditions that will make it worse when it hits. The debt mountain is only sustainable while interest rates stay low.

Of course, the bubbles could have been avoided with better Federal Government tax and population policies.

Negative gearing and capital-gains tax concessions fuelled a rush to investor housing, driving up prices and increasing the debt burden for new owner-occupiers too.

Since the 2011 Census, the population has increased by roughly the same amount as Adelaide, Canberra and Hobart’s total population combined.

Meanwhile, incomes have faltered – growing by next to nothing over the past four years. Worse, real income-tax rates for those in the bottom half have gone up, because the tax rates have not moved with inflation. Further, some people on very modest incomes of around $35,000 can face effective marginal tax rates of nearly 100 per cent, when student-debt repayments, family benefits and other government help is withdrawn and they move into the second-tier tax bracket.

On the government side, there is a Catch-22. We have had more than a decade of do-nothing governments who fear the voters. They fear losing power if they offend some voters. So they do nothing and offend all the voters instead.

Government are supposed to respond to changing circumstances. Present circumstances (as highlighted by the Census) require:

1. Lower immigration.

2. Changes to property taxes.

3. Income-tax scales that are fairer to the middle.

While we are at it, we could make a couple of changes to political and corporate culture that would go a long way to making the system fairer.

First, we could end the culture of rent-seeking by special-interest groups. We should radically change the rules on disclosure of political donations and have compulsory disclosure of all meetings between politicians, senior bureaucrats, lobbyists and industry groups.

For too long, people like the food industry, pharmacies, the mining industry, the banks, the financial sector, big retail, utilities, property developers and others from the big end of town have been able to secretly chew the ear of government to get the rules written in their favour. Now the top 1 per cent control 70 percent of the wealth.

On the corporate side, we should cut high CEO pay and break up big financial institutions. More importantly, directors and top managers of companies should not be allowed to own shares or share options in the company they are managing.

It is an obvious conflict of interest because it is in their power to effect short-term changes in the share price to favour themselves when they want to sell or redeem.

Far from being an incentive to manage their companies better for the good of all shareholders and for good corporate citizenship, these arrangements encourage the opposite.

When market analyst Nassim Taleb was asked at a congressional hearing into the 2008 US recession that wouldn’t lower pay and fewer share options prevent companies from attracting the best talent, he responded ascerbically: “What talent?”

Australia is almost in the US position of not learning from 2008 and having some financial institutions “too big to fail”. But with this increasing indebtedness, governments might not be in a position to do any more bail-outs and central banks cannot cut rates anymore because there is nothing left to cut.

Digital Finance Analytics estimates that a fifth of middle-income households in Australia have “no room to move”. It means that if interest rates go up, they will default.

Australia has been lucky to date in having a very small mortgage default rate, but we should not be complacent. We have not had a combination of high indebtedness, stagnant wages and rising interest interests. Right now only the absence of rising interest-rates are preventing the perfect storm.

People imagine that credit-card debt and personal unsecured debt pose the greatest threat. Not so. They are trivial. Combined with student debt they come to just 7 per cent of household debt.

Owner-occupied households have 56 per cent of the debt. This is not so bad because owner occupiers will do everything possible to meet the payments to stay in their own home.

No, the real ticking time-bomb here is the 37 per cent of household debt that was incurred for investor housing – $740 billion of it.

The trouble with this debt is that, at the first sign of significant trouble (such as an interest-rate increase), up goes the For Sale sign as investors cannot meet rising interest payments. Prices plummet as people get desperate to sell. The bubble bursts. Banks call in loans.

The other trouble with investor debt is that much of it is interest-only for a relatively short term – three or five years. Investors just assume banks will roll them over at the end of the term, but they may not if the market value of the house offered as security has fallen. The investor in most cases will have no other source of finance and will default. If the sale of the investment house does not cover the loan, bankruptcy would loom.

It is not only the growing size of the debt, but it changing nature that makes it so dangerous – a danger that lays squarely at the feet of the Federal Government’s deeply flawed tax policy.

The 2016 Census results should ring alarm bells to start slowly tweaking tax and interest-rate policy so that the bubble slowly shrinks without popping.
CRIDSPIN HULL
This article first appeared in The Canberra Times and other Fairfax Media on 1 July 2017.

{ 2 comments… read them below or add one }

Robert Lopez 07.01.17 at 4:23 pm

There is so much of this type of analysis out there these days. People have been saying, for years, that Australia is going to have a housing bust and for years they have been wrong. It is July 2017 and they are still wrong. The why is complicated. You talk about investor flight and house price decline. It is my understanding the world is awash with money, 10 trillion printed since 2008 and a lot of that money will buy Australian houses if prices decline. There are offshore ‘hedge funds’ out there that have been specifically setup to buy Australian real estate if prices are seen as being distressed. Moreover, if Australian house prices do fall it is highly likely the arms of Australian government will do whatever it takes, slash interest rates, or go negative if that is not enough, print money, create subsidies, turn foreign investment rules on their head and/or whatever else is needed to prop up house prices. I think it is all this that is being missed and why I still believe house prices may not fall for some time yet.

Tania Silver 07.03.17 at 5:36 pm

Approximately 19% of baby boomers own at least one investment property, as opposed to 20% for Gen X and 22% for Gen Y (your next greedy landlord).

http://www.yourinvestmentpropertymag.com.au/news/22-of-gen-y-owns-at-least-one-investment-property-226573.aspx

The vast majority of people in all these generations don’t have one. This is a class issue, not an intergenerational issue.

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