Banking Culture has Australians Addicted to Castles
Private debt climbs while financial institutions increase profits
Taking nothing away from our media, I’ve got something I wanted to talk about…
Lets take a brief walk down Australia’s home-ownership process:
It starts with the bank assessing your risk based on factors such as income, assets and job security. There are regulations in place to assure this process is done in the best interest of both borrower and lender. The bank then fronts the cash for your home, at which point you sign away 25 years of your income. You pay the loan back at a rate which is manageable over a 25-year term knowing interest is an acceptable expense when fulfilling the Australian dream.
Depending how savvy you were with your purchase, you get the house revalued hoping to tap into some of its newly realised equity thanks to an aggressive property market. The bank is quick to remind you of your lending capabilities — heck you’ve now been with them for 4 years slowly chipping away at your principal home loan. You hear in the media, in the property magazines, in your favourite TV shows just how stable property is as an investment for retirement. The property prices in your area are continuing to increase and you have the capability to purchase an investment property. A positively (or negatively) geared investment property has no down side, how could it? You go ahead and borrow from the equity of your principle place of residence. A few bank fees later and you are now a true blue property investor.
As a country, why is this a problem?
Depending on your source, Australia has the largest private debt out of any country in the world, matched only by a couple of our wealthy European friends who invest throughout the Eurozone. Our private debt was bigger news in previous years with regulatory bodies and the Australian government pressuring financial institutions to sure up their balance sheets. After much outcry and all of those extra costs indirectly being passed straight back to the borrower (consumer)/shareholders, we now enter 2017 with private debt growing even further.
Ordinarily private debt isn’t such a bad thing. In fact context is key to any observation about private debt. Unfortunately, it’s difficult to present all of the information in a simple manner and there will always be much debate over the ins-and-outs of our country’s elephant in the bedroom.
Figure 1 is a chart showing net worth vs household debt, in context with America prior to their banks fueling the GFC.
In 2013, household debt stood at over $1.84 Trillion — that’s equivalent to $79,000 per person… This figure has continued to increase in the last few years. Below, Figure 2 shows what that debt is comprised of:
In the grand scheme of things, it’s unhealthy for a country to channel all of its disposable income into an asset class that brings little benefit to the economy — unless of course you own shares in the financial institutions or carry out further building/repairs. The trillions of dollars tied up in 20+ year loan terms, is money that isn’t being invested in other asset classes that could be bringing tangible value to our economy. We’ve let our obsession with castles, channel our ‘mining booms’ income into private debt that sits stagnant in our financial corporation’s ledgers, effectively ruining our current prosperous economy for future generations.
The problem revolves around easily accessible and affordable mortgage rates, the asset class appreciating and Fear Of Missing Out (FOMO). When your parents, friends, relatives and politicians all have ‘successful’ property portfolios there is no reason to question the path to financial freedom.
In late February 2017 Commonwealth Bank of Australia recorded another half-yearly record profit on underlying cash profits — $4.9B. This in an economy that is sitting stable and by no means booming. CBA’s tracking to beat 2016’s annual record profits of a cool $9.45B — with its latest profits being announced with an out of cycle increase to investor home loans… It seems they know something we don’t?
Banks have their say in where our economy is. We are surrounded bybanking PR in our daily news and media. New property hot spots, renovation shows like The Block and countless property investment magazines offer us watered down advice. In fact last week I counted six different news items relating to ‘boom suburbs’, how to get the best mortgage deal and renovating to increase equity.
Often Australians don’t realise news stories have a public relations agenda hidden within the context of news. Slowly and steadily these hidden agendas have blossomed in our culture and nation.
As the property market in Australia remains stable and continues to blossom in some areas, the Australian dream will live on and with it the debt that comes with owning a slice of this dream. We will continue to believe the best place for our money is in a mortgage.
While we live in the era of ‘fake news’ our political figures talk so much rubbish that the media is effectively part of the problem. We have an ever-growing gap between the reality of our property market and the PR spin that the banks put on it. Our obsession with property has hit some people hard, Gladstone and Mackay are a perfect example of a bullish market that has left hundreds of families and investors in a world of despair. Brisbane’s unit oversupply is another area where high levels of stress are contributing negatively to our economy.
A fragile housing market exists when the majority of investor loans are leveraged through other properties equity.
Recently Queensland’s ex-premier Anna Bligh got appointed top job at the Australian Bankers Association. The same premier who was at the helm for the Traveston Dam shambles and the privatisation of a number of key state owned assets (tolling, rail, forestry plantations etc.) is now running the cashed-up lobbying and union movement that supports our banking industry.
It seems fitting that a person who was also a former national president of the Labour party has been appointed commander and chief of this union. At a time when the head of the federal Labour party — Bill Shorten — had been calling for a banking royal commission. Strategic?
‘They were not fighting over what to do, but over whom to blame’ — Atlas Shrugged by Ayn Rand
This quote from the book ‘Atlas Shrugged’ seems fitting as we observe a slow, shallowly hidden deterioration of our economy. Our federal politics continue to be influenced by corporate interests, while the parties themselves play the blame game.
A new horizon is coming, where corporate interests are replaced with individuals interests. Where governments primary role is to fight over what to do, because whom to blame is already known. Transparent, immutable structures are going to take over the world — imagine the progress when this reversal happens.