There is a widespread belief that the sub-prime debt problems in the US is something that can never happen to Australia. The idea that Australian lending is more ‘prudent’ and ‘responsible’ than their US brethren is quite popular. That, along with record low unemployment and the strong resource boom powered by the eternally booming Chinese economy gives the impression that the Australian economy is very strong and that no harm shall befall it forever and ever. Add the mob-pleasing cheerleading ‘research’ by institutions such as BIS Shrapnel (see Another faulty analysis: BIS Shrapnel on house prices) into the mix and we get further incitement into debt overindulgence. Indeed, Australia’s love affair with debt is no different from drug addiction. Eventually, when the drug wears off, painful cold turkey treatment will follow. As we have warned before in Aussie household debt not as bad as it seems?, we will sound our warning again.
Today, we will refer you to a sobering documentary from the ABC- Debtland. This documentary is highly recommended, especially for those who are (1) thinking of ‘investing’ in residential property (see our guide, Are Australian residential properties good investments?), (2) owning huge amounts of debt and (3) thinking of getting deeper into debt. Here, we will quote some important points and add some of our own comments from the transcript of this documentary:
Brian Johnson, a Banking Analyst from JP Morgan said,
The Banks are just handing out money on credit cards like there is no tomorrow. For me it’s quite terrifying to think that the average household in Australia, so the average, now has three months of their monthly disposable income on a credit card balance.
In addition to their burdensome mortgage debts, Australians are taking up even more debts from multiple credit cards, store cards, personal loans, car loans, etc. As Brain Johnson said,
It strikes me that it’s nonsensical, the amount of total debt out there. And no-one seems to know how much debt because a borrower can borrow money across multiple providers of credit.
Thus, each provider of credit does not know the true picture of a borrower’s financial position. While each credit may be sound on its own, how sound will all these combined credit be when concentrated on a borrower? If we do not really know how much debt a person has, how can we really know what the effect of rising interest rates be on that person?
Now, what about those families who are under severe mortgage stress? ABC reporter, asked,
So do you think we’re seeing a situation where people are really under stress on their mortgages and are getting credit cards and basically living off credit on the plastic?
Brian Johnson answered,
There’s no other way that you, there’s no other conclusion you can really draw from the data. And in fact when you speak to the banks about that quantum level of credit card debt there’s a noticeable silence.
Does Australia’s lender practice prudent lending practices? Here are some of the shocking cases…
Kim White, former National Australia Bank (NAB) said,
We would see people come through and we’d estimate how much it cost to lend them all their payments, everything else like that. At the end of the month they’d have $100 left over, but sometimes the system would still say, lend them the money and that person is living on a razor edge.
And you know that they’re not going to be able to afford it. They’re going to live on their credit card for their basic living expenses and get themselves into worse debt. But the system would say do it, the bank would say do it or else you’re going to be under the gun, you’re going to be performance managed out. So we’re in the situation where we lent to whoever we could and as much money as they wanted.
ABC’s Four Corners said
If Kim White wouldn’t rev up the credit limits, someone else would.
In another case, Commonwealth Bank of Australia (CBA) provided credit to a refugee family:
Deng Gatluak and his family fled to Melbourne from war torn Sudan. A refugee with no English, no job, and no concept of finance – yet the Commonwealth Bank gave him a $20,000 car loan. The repayments left this large family with next to nothing to live on.
His wife Nyatut still speaks virtually no English and has no assets, yet she was made the guarantor on the car loan.
Is this just some isolated cases? Good question. As Gary Rothman from Uniting Care said,
If we’re seeing people on low incomes and on Centrelink benefits being lent money that they have no way of repaying, then what are they doing to people who are on even higher incomes and how are they burdening them with debt that they can’t repay?
What if an economic recession hits Australia? As we said before in Aussie household debt not as bad as it seems?
A severe downturn to the Australian economy may or may not be statistically likely, but given the level of unprecedented leverage, you can be sure the impact will not be small.
Professor Terry Burke from Swinburne University would agree with us,
What we found was that almost 50 per cent of all households were relying on either overtime or a second job of the main income earner to sustain the mortgage. Now that’s fine so long as the economy is still steaming along at full speed but any slow down in the economy, that’s what will go, the part-time job, the casual payments, overtime, and then you’re in trouble.
In a Sydney suburb of Kellyville,
Out here houses bought for $900,000 a few years ago have sold for not much more than half that. The staggering decline raises questions about the valuations the banks and the buyers relied on.
Brendon Hulcombe, CEO of Herron Todd White said,
The valuer should be able to act without fear or favour but unfortunately we’re getting a lot of pressure from lenders who want to get high valuations to get their deals through.
I don’t know how many are being over-valued but I can tell you that every hour of every day, pressure is put on valuers to write higher figures.
Furthermore, ABC reported that,
Just as banks have become freer with their lending they’ve become looser when it comes to assessing what a property is worth.
Often they don’t even bother to send a valuer through the front door and they’re not always aware of the backdoor deals being done to get the sales though.
As it turns out, valuations are subjected to corruption too as Matt Ganter, a valuer from Herron Todd White said,
There’s a bit of an issue out here where developers rebate to the tune of up to around about 15,000 on a block for 160,000, which brings the true value of what people are paying down to the 145,000 mark.
[Banks are getting false valuation] if they’re relying on the automated valuation models and there’s rebates involved, absolutely.
Now, in addition to mortgage loans and credit card, there are other kinds of loans including margin lending for shares, store cards, and so on. One of them, GE Money was singled out for irresponsible lending with exorbitant with high interest rates.
We wonder how much sub-prime debt does Australia have.