Jun 222007
 

Mortgage repayments Hit New Record High
As someone who works within the Australian finance industry, I’m always alert to news and events which appear in my morning mail alert from Plugger.


This morning I noticed this item, which piqued my interest. As some readers might be aware, I’m not a Wayne Swan fan by any stretch of the imagination. There’s just something slimey about the man, and I don’t consider him to be the right proponent for Labor’s economic policy promotion. This article tends to bear out my feelings.

Today the Reserve Bank has released data showing a new record high in the level of household income being lost to mortgage interest repayments.
The Reserve Bank Bulletin shows households are losing a record 9.5 per cent of their disposable income to mortgage interest repayments. This figure is:

  • The highest in our history – 55 per cent above its highest point under Paul Keating of 6.1 per cent
  • nearly 80 per cent higher since interest rates started rising under John Howard in 2002
  • up from 9.3 per cent at the start of the year.

Fair comments all and statistically correct, all though what relevance a 0.2% increase in mortgage interest payable since January has on the overall political argument escapes me. The last interest rate rise was November 2006, so to me, any increase in mortgage interest paid per capita income says that people are still borrowing. Not that interest rates are rising. Even a brief scan of the RBA statistics reveals as much.
It’s true that under this government we’ve seen no remarkable economic reforms, especially in the taxation arena. Yes, I know, there’s the GST, but I don’t see the GST as anything to crow about, or which helps put those valuable dollars back into the consumer’s pockets. Far from it. If anything, the GST rips more out. The GST has become what it should never have been allowed to be and that’s a mere governmental cash cow, as opposed to a one-stop-shop replacement for all the direct and indirect taxes we still run across in daily life.
It isn’t true that, as Howard claims, workers have never been better off, especially in relation to mortgage interest per capita. Even a passing glance at the graph with accompanies Swan’s polemic bears out that workers were never better off in 1994, under the Keating Labor government. Since that time, workers have become progressively worse and worse off, especially so since 2000.

swan_mortgage_table.jpg

So is this spin or is it reality? Is it government mishandling of the economy, or is it simply escalating personal and mortgage debt against a background of near zero wages growth? I believe it’s the latter. I see it daily. People know they have equity in their properties because real estate prices have boomed over the last six to seven years. Where previously the ten year old car would be made to last another ten, it’s now a case of “to hell with it, I’m having a new car” and primarily, it’s being paid for through refinancing of the family home to extract the equity. Little additional repayment is required because the loan term is extended back to it’s maximum, and rates haven’t risen sufficiently to deter the average punter. How can the government be accused of mishandling something they clearly have little or no control over? The annual tax cut only makes people feel better about their escalating debt, so I suppose that’s not helping much, but as for mishandling? I don’t think so. If anything, the Howardians have effectively sat on their hands these past eleven years. Times have been good, no-one can deny that, but one must ask the question as to why. The undeniable response is due entirely to the economic reforms put into place by Keating which encouraged industry expansion and development, encouraged foreign investment, and to a great degree, discouraged the drive by the working classes for a bigger and bigger share of profitability.
But all good things must come to an end. The current resources boom will end. Will a surge in wages demands fuel that end? Only time will tell, but in the short term, economists are punting on the wave crest rolling through 2008, at this stage. If the government changes later this year, I would expect the incoming Labor government to continue to ride the Keating-created wave. How it keeps the lid on wages while debt levels continue to rise is the $64,000 question. Wages must rise to keep pace with inflation at the very least. Interest rates WILL rise almost immediately following the election, and again in early 2008 if demand for borrowing isn’t stemmed. Fuel prices might act again as a quasi-rate increase, but that’s only likely to urge wages demand forward as an inflationary factor. The bottom line being that this country is heading towards a roadblock on the highway to happiness. How we arrive there and whether we plow headlong into the roadblock or pull up in time to get out and clear the obstruction away, is yet to be seen.
So, is the Swan polemic spin or reality? I reckon it’s 70/30. Being a politician, he’s spinning like a top. He’s not focussing on the reality because that won’t make political ground on his opponents. The reality is one of governmental inaction in an election year, and an economy which looks sweet on the surface, but is starting to go foul just underneath. You want proof? Take a gander at recent rises in fixed term interest rates. Most people are on variable rates because the good times were, and in some views still are, rolling. Fixed rates are now more expensive than variable, whereas the opposite was the case as little as twelve months ago. The time to lock in is past. Come the next rate rise, people might just start to panic and want to shift to fixed interest. That option will be more expensive so they’ll sit pat on variable, but the horns will be well and truly pulled in. The brakes will be on. Will we hit the wall? Like I say, only time will tell.