Who wants to endorse the Reserve Bank? More of the tightening...

Who wants to endorse the Reserve Bank? More of the tightening bias to come, continuing family/mortgage stress and whose policies may contribute to a deflationary effect

More Australians defaulting on mortgages: report
By business editor Peter Ryan

Posted Tue Oct 30, 2007 9:14am AEDT

A new report says more Australians are struggling to repay their mortgages.

With the next critical meeting of the Reserve Bank only a week away, there is fresh evidence of growing mortgage stress across Australia.

While an almost-certain interest rates hike will add to the woes of families in mortgage belt suburbs, a new report is now showing rising defaults in regional Australia.

Hardest hit is regional New South Wales where the drought - in addition to fives rates rises since the 2004 election - has pushed defaults up 60 per cent over the past year.

The credit stress in New South Wales is reflected in other states with defaults in regional Victoria up almost 52 per cent, South Australia 50.5 per cent and Queensland 42 per cent.

The bleak outlook comes from the credit reference agency Veda Advantage, which says more households also are defaulting on credit card and utility bills.

Veda Advantage external affairs chief Chris Gration said the new data demonstrates a growing "debt divide" in Australia.

"We appear to have in regional Australia and in the mortgage belt suburbs in part of the capital cities a much greater sense of financial stress," he said.

"The drought effect on regional Australia is quite significant so I think we can infer that families in regional Australia are certainly suffering because of the effects of the drought."

Mr Gration says the survey also shows that in addition to defaults on mortgage payments, Australians are failing to pay credit card and utility bills on time.

"One of the things about Australians is that families make their very best effort to pay their home mortgage," he said.

"The home mortgage is the last thing a family will default on. So the rise in defaults is a sign that we have serious financial stress in part of the country."

The report also found that stress in mortgage belt areas in suburban Australia are also on the rise with NSW 43.5 per cent, Queensland 44.4 per cent and Victoria 40 per cent.

Mr Gration refused to speculate on the impact of an interest rate rise following the next meeting of the Reserve Bank board, but said almost half of the families surveyed are concerned about another rates hike.

"Our concern is going into what is a possibly tight credit cycle over the next 12 months, Government needs to take action to protect both borrowers and lenders," he said.

"We're calling for the Government to act swiftly next year to ensure that borrowers and lenders get the best credit information and that there's stronger consumer protection."

http://abc.net.au/news/stories/2007/10/30/2074387.htm

Economist predicts further rate rises
Australian Broadcasting Corporation

Broadcast: 07/11/2007

Reporter: Michael Brissenden

For most economists, today's interest rate rise was a done deal once last week's inflation numbers came out and Associate Professor Steve Keen from the University of Western Sydney believes the Reserve Bank statement signals there are more rate increases to come.

Transcript
KERRY O'BRIEN: So how will this latest interest rate rise impact on mainstream Australia? The Housing Industry Association says today's rise will "see more than 650,000 Australian households caught in the grip of mortgage stress". Dr Steve Keen is an academic economist at the University of Western Sydney who has done substantial research on Australia's debt levels, both household and business debt, with a monthly report called Debtwatch. He joins me now.

Steve Keen, how will this rate rise impact on various mortgage belt households around Australia?

STEVE KEEN, ECONOMICS, UWS: Well, it is going to make what might look like a farily minor increase in the amount of money that has to come out of the household budget that has to pay the new level of average mortgage payments just in term of the interest payments that are made on the mortgages. It's going to go from 11.4 cents in the household dollar just to pay the interest on mortgages to 11.7. Now that doesn't look like very much but if you go back and history and take a longer view and, say, what was it like 30 years ago in 1977, it was two cents in the dollar, so we're talking virtually six times as much. You go back to 1990 which is when we had those of course, astronomically high nominal interest rates was 4.5 cents in the dollar. So even though we've go a substantially lower rate of interest now, it's almost three times as much coming out of the household budget to cover interest payments, and just since the 2004 election, we've gone from eight cents in the dollar to now about 11.7. So almost 50 per cent higher again than during the 2004 election.

KERRY O'BRIEN: Before we look at - speculate on the potential impact on this latest rise, how clear is the evidence that the rising interest rate environment is forcing some people to sell their homes?

STEVE KEEN: Very high, and it's being disguised by the official figures as well. At the parliamentary hearing which the economics committee held about two or thee months ago, one of the mortgage insurers commented there that mortgagees don't like to have mortgagee sales because they face about a 15 to 20 per cent in the price they're going to get in the market, so they actually pressure the people who have got into distress to sell before it gets to the stage of a default. Now even with that, the level of defaults has risen by at least 40 per cent over the figures the same time as last year. So it's a very rapid increase in defaults when again we know they don't really tell us how bad the story is.

KERRY O'BRIEN: So what is the picture now with rental accommodation and what is the likely impact of this next rise?

STEVE KEEN: That is almost where you've got to say "who's writing the script here?" Joseph Heller, because at the same time we had what people call the housing boom, if you take a careful look at what actually happened, we didn't really build all that many houses. Over 90 per cent of the money that was borrowed during the so-called housing boom was used to buy existing properties, less than 10 per cent went to build new accommodation. That's why when we got to end of this so called housing boom and found ourselves with a rental crisis, almost before we could blink. America on the other hand did build large numbers of houses and they now have a glut. So we've got the ironic situation at having house prices that are too high for people to afford and simultaneously a shortage of rental accommodation for people who can't afford to buy a house which is driving up rents and to me that's the real irony of this latest interest rate rise. The Reserve Bank sees increasing interest rates as a way of controlling inflation, but in fact the biggest contributor to inflation in the last set of figures was the increase in rental costs, which was 5.8 per cent over the year, so it's catch 22. We're putting up interest rates to control something that's going to become more expensive.

KERRY O'BRIEN: But that will be exacerbated again?

STEVE KEEN: I think so, because again, taking a look at breaking down carefully where the rise were and where the falls were, there were a substantial number of classifications in the CPI that actually fell over the last year. I think the most was furniture, which fell by more than one per cent. But the biggest rises were all in what are known as the fire economy, which is finance, insurance and real estate. Now those are all segments of the economy where if you drive up interest rates, you're likely to cause more inflationary pressure.

KERRY O'BRIEN: So what's been the cumulative effect on house prices in the big cities like Sydney and Melbourne after the first interest rate rises since the last election, that's the first five, and what's likely to happen on the residential market after this rise?

STEVE KEEN: In terms of prices, or...

KERRY O'BRIEN: In terms of value of houses, yes, house prices.

STEVE KEEN: Value of housing over the - when you cite, define the, really, the latest boom which began about '94, house values have increased by about 250 per cent over that period of time. At the same time, debt has increased about 600 per cent. Now prices have been driven up because people are willing to borrow more money than you did to buy the place in the first instance. What happens actually is debt rises faster than prices. I think this latest rise is likely to be a sting in the tale because you get to a certain point where people look at the price rise and think, can I believe there'll be another price rise again, that means that somebody that can borrow more money than I did to buy this place off me in two or three years time. I think this might be the one that breaks the camel's back and people lose that expectation and then we will see prices falling here as we have seen in America.

KERRY O'BRIEN: Wages, when you talk about comparisons with time past and today, interest rates may have gone up but of course wages have risen as well, haven't they.

STEVE KEEN: Not as much. You see, again, when you take a look at the comparisons of the real increase in wages, yes there has been a substantial rise in real wages in the last 17 years since the depths of the 1990s recession, so if you go back to the 1990s recession and compare real wages now to real wages, then you see they've rise by a bout 25 per cent, which is quite substantial, but across the same time period the real interest burden has gone up by over 250 per cent, more than 10 times as much. Even if you look at the last election, since the last election, real wages have risen by about five per cent, which is a significant achievement, but across that same time period the real interest rate that households are facing has gone up by almost 50 per cent, so interest rates are cutting more and more into the costs of living, which is why people are not feeling that they're better off than they've ever been before.

KERRY O'BRIEN: Now you've expressed concern a number of times about the growth of debt in Australia. Where does household debt sit today compared to the past?

STEVE KEEN: Well, household debt back in 1977, for example, was equivalent to about 18 per cent of household disposable income, so let's say if you take round figures and say you had a disposable income of $100,000, you'd owe $18,000 on a mortgage. Now you come forward to today and if you have a disposable income of $100,000, again I know that's high but let's take a round number, you owe $137,000. So we've gone a tiny fraction, really, of you income being your debt, to more than you earn on annual basis on the average. And of course, a large number of households don't have debt so that's much more focused in those who are in mortgage stress.

KERRY O'BRIEN: But I heard the point put to Peter Costello, the Treasurer, tonight on ABC radio about household debt, and he said that you don't just look at debt, you look at assets, and while people's debt may have risen, so in many cases is the value of their assets, in particular, the family homes.

STEVE KEEN: Assets, I think the first three words of that - the letters of that word are quite important because the way we measure assets is nowhere near as real as the way they measure debt. If you - I say I've got a debt of $100,000, I owe somebody that gives me a permanent commitment to pay based on that $100,000. If they say my house is worth $500,000, I have to find someone who's willing to buy it. Now the asset market is nowhere near as broad as the market for goods and so. So these prices are all imputed and it's quite possible that those prices won't be realised when you actually have to sell, and certainly that's what's happening to a large number of Americans now. And it simply is not possible to have asset price rising forever faster than consumer prices, and America's learning that lesson, and I think we're going to learn it somewhat later.

KERRY O'BRIEN: Some economists are expecting yet another rate rise in the not too distant future. The Reserve Bank is trying to do its job under the charter, keeping inflation in check, in the face of Australia's biggest ever resources boom. Surely the Reserve can only do what its charter instructs it to do, and that is keep inflation to three per cent or less.

STEVE KEEN: That's its compact with the Government. It also has the charter that says it has to both maintain low inflation and full employment, and it's making judgements about the importance of inflation in limiting the extent in which we can have a rise on unemployment. Now I'm afraid that we're making decisions based on 40 or 50 years when we've in fact been in a debt bubble that goes right to the 1960s, and we have driven levels of debt so high that we are now experiencing twice as much debt as caused the Great Depression. Now in that situation...

KERRY O'BRIEN: But you can't immediately draw the analogy that that means there's a Depression lurking...

STEVE KEEN: No, I don't, but what I do say is that we have to look very carefully at inflation now. Inflation was the scourge of the 1970s. Deflation was the scourge of the 1930s. Inflation now is quite low on historic terms. Debt is astronomical. I would rather say let's pay a bit more attention to debt and worry less about inflation now because we may actually want inflation. I'm not saying we will get into a situation where Japan is in 1990, but Japan entered a debt deflation in 1990, it's stuck there for 15 years, and the Reserve Bank of Japan spent 15 years trying to cause inflation and they failed abjectly.

KERRY O'BRIEN: Steve Keen, we're out of time, but thanks for talking to us.

STEVE KEEN: Thank you.
http://www.abc.net.au/7.30/content/2007/s2084263.htm