Investors beware! Signs of economy under stress

June 2nd, 2007

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In our previous article, Can Australia?s deflating property bubble deflate even further?, we mentioned that:

In Australia?s case, with her towering levels of debt, any external shock can easily tip her over to a recession, which can lead to further asset (e.g. real estates and stocks) deflation. Indeed, from ?Bad debt rising among homeowners? in the Daily Telegraph, we can glimpse a portent of what can happen in a much wider scale when a real recession hits.

Right now, the level of household debt is putting an increasing strain on the grassroots of the Australian economy. Underneath the resource boom, boom stock market, record low unemployment and ?benign? inflation (again, we have to stress that the official inflation measurement is misleading: see Have we escaped from the dangers of inflation?), there seems to be a spreading rot.

To impress our point, let us look at some numbers from this page at the Sydney Morning Herald (SMH):

  1. 12.5%?The amount by which bankruptcies had increased in the 9 months to March.
  2. 51.6%?The proportion of people surveyed by the financial advisory firm, iPac, who report feeling secure in their finances, the lowest reading since the series began in March 2005.
  3. 32%?The growth in debt agreements, which offer the chance to consolidate debts to avoid bankruptcy, in the 9 months to March 2007.
  4. 1984?The year when housing affordability was last this low.
  5. 30,000?The current number of bankruptcies per year.
  6. 2720?The number of claims for the repossession of land lodged with the Supreme Court of Victoria over the year to April, the highest for 6 years.
  7. 12%?The proportion of household disposable income used to meet interest repayments (note: this is just only the interest payment, not including the principal!).
  8. 14.2%?The percentage of sub-prime securitised loans that are in arrears for 30 days or more, the highest since December 2000.

In The home front from the The Age, we read of:

Now, evidence is emerging that growing numbers of Australians are struggling to service their debts. It is resulting in growing bankruptcies, credit agreements and, evidence suggests, mortgage defaults and evictions.

At this point in time, as that article said,

It could be argued that the stress is limited to those on the fringes of the economy and not so-called “middle Australia”.

Indeed, the official numbers from the Reserve Bank of Australia (RBA) seems to indicate this. However, it could be that (as the article said) there was incomplete data (namely, the statistic for default rates) to paint a more accurate picture.

In any case, this is a trend to watch out for?it can be a further indicator that the Australian economy is at a turning point.