DEBT BUBBLE WILL BURST SOON IN AUSTRALIA – SHOW ME THE MONEY!

Ignorance is bliss, until it hits you where it hurts! Human beings naturally want to ignore painful outcomes, postpone the hurt and pretend and hope eternally that the day of reckoning never eventuates.

That minor tooth ache is just an ulcer, not an infected abscess about to burst, the chest pains are just indigestion and not angina and the belief that the global economy will improve quickly and robustly under the greatest debt burden in human history, well we are all depending on that to be true so hope reigns supreme.

I am constantly amazed by the optimism of many given the dire state of the global economy. I am currently back visiting in my home country of Australia and following a number of discussions with a diverse and eclectic bunch of Aussies was inspired to write this blog. To clarify my definition of “diverse and eclectic” my discussion group included business owners, tradesmen and women, apprentices, finance sector workers, property managers and bright minds like the chief economist at ABC Bullion Jordan Eliseo and my former economics professor Steve Keen.

This blog is very much a collaboration of thoughts as they were expressed to me and my response which aims to breakdown the issues facing the Australian domestic economy as I see it. It will have a particular focus on Australia’s stereotypical family, demographics, and the challenges and headwinds they will likely face over the next decade. I will attempt to crystalize and simplify this analysis into a format for the layperson to understand by applying relevant data, statistics and explanations to what the Australian Beureau of Statistics now defines as a “stereotypical Australian family”.

Economics is not meant to be a confusing, boring, filled with mumbo jumbo terms and charts that look like they have been produced by people from a different galaxy. It is really quite simple and the best place to begin analysis can be as obvious as the family budget!

How tight is the average budget, how much wriggle room is there? I hear the stories about families struggling with the cost of living, I see my own power bills going up, food prices rising rapidly, petrol prices going crazy… But still people are surviving, working, eating, sleeping, working, eating, sleeping, working, eating, sleeping, working, eating, sleeping… Those three things is about all people can do by my calculations.

So here is my take for policy makers and the board members of the Reserve Bank Of Australia. Here are the calculations based on the cold hard facts. Here is how Mr and Mrs Average Australian family with their 1.9 kids (based on the last census) are living by my reckoning. I thought it a timely opportunity given the recent handing down of the Australian Federal Budget that the politicians/policy makers and reserve bank board members understand how regular families are operating/struggling.

There is a whole raft of statistical data that can be found here on the Australian Bureau of Statistics website  http://www.abs.gov.au/websitedbs/D3310114.nsf/home/Home?opendocument

At the risk of becoming overwhelmed and complicating things I will give a generalised assumption based view on figures such as average household income and general costs of living. I will also assume average cost of a mortgage based on interest rates at the 5% low interest rates that can be locked in today. I say assume the average, as much of the data that is openly available measures many of these data points using either the “median” or “mean” methods for calculations. In my opinion both methods can provide warped or skewed version of reality so relying on them as factual and truly representative to form a basis for opinion is absurd.

The median house price in Sydney for example rose 14.5% in 2013 to $655,250 according to this article published in the Sydney Morning Herald.

 http://www.smh.com.au/business/property/australian-capital-city-house-prices-rise-10-in-2013-20140102-306tk.html

In my humble opinion Mr and Mrs Average and their family live in a home with a value perhaps 5-10% less than this median price, a value closer to $550,000.

Average household income is the next important figure for budget formulation. A recent ABS report stated that “average” annual earnings for individuals were $74,000 a year last May. Though many analysts use this number in calculations it’s accuracy and therefore validity is highly questionable. I would assert that this figure doesn’t reflect typical circumstances. I believe that the definition of “average” is an irrelevant socio-economic metric that is increasingly undermined by rare but very large individual incomes and changing and evolving tax benefits and government assistance schemes.

With the above in mind I believe the median household disposable income should be used for calculations. According to the Australian Beureau Of Statistics the median household DISPOSABLE income was a mere $715 per week.  I believe this to be a more accurate reflection of where the average Australian household family income is before government subsidies are applied.

If we use this $715 per week as a starting point and add $220 per week in assistance for 2 children (maximum family tax benefit per child is $220 per fortnight per child) then the median household disposable income is $935 per week.  Given the fact that many of these numbers are arbitrary I will round the median household disposable income UP to $1000 per week or $4000 per month.

I am an employer, I have manufacturing businesses. I know the salaries my employees earn because I PAY them. I hear their stories, child care costs eating into the supplementary income, high cost of living etc. In this blog I want to work through the average budget to show that Mr and Mrs Average Australian Family cannot possibly be saving and if they are it is only due to the record low interest rates (lowest in Australia’s history). When interest rates moderate higher off this low base these savings will evaporate.

So with all of the above in mind here is the budget.

TOTAL DISPOSABLE INCOME (GOVERNMENT BENEFITS INCLUDED) - $4000 PER MONTH

HOUSEHOLD COSTS

Costs to service a $370,000 mortgage principle and interest at low interest rate of 5% fixed for 5 years is $2000 per month

Power and Gas (energy) and Water - $200 a month

Food for family 2 adults and 2 children - $900 month

Petrol - $250 per month

Council rates - $150 month

These costs total $3500 leaving $500 of the household disposable income remaining to cover items listed below:

Home insurance, car insurance

Car repayments

Medical Aid

School fees, excursions, books

Incidentals – car servicing, broken windows, new tyres for the car, car registration, mobile phone bills, internet connection, do I need to go on?

OK I will. Toll charges, parking and speeding fines, basic clothing needs, sheesh birthdays and Christmas and for Hubby what about the anniversary? Oh I forgot the dog! Pet food, the odd trip to the vet.

When you keep on adding up you see there is soon nothing left over. A trip to the movies or a restaurant once a month for a family of 4 is now a $60-$100 outing, as is a trip with the kids to watch the football.

Entertainment money and consumption is nearly a thing of the past. Foxtel is $50-100 per month, Alcohol, cigarettes, who can afford them? It seems many must now be living pay cheque to pay cheque, there simply has to be more month than money, a tragedy given the fact that money makes the world go around… Really it does!

A simple analogy is the story of the the butcher that takes his wife to a hotel for their anniversary. The room costs him $100. The hotel owner then takes that $100 from the Butcher and gives it to the hotel cleaner for her weeks work. The hotel cleaner takes that same $100 and buys a pair of shoes to go out with on Friday night. The shoe shop owner is not going out on the weekend but has people coming over for a barbecue at his place so he goes to the butcher and gives him that very SAME $100 to buy the steaks and sausages he needs… are you following?

The butcher got his $100 back after it passed through the hotel owner, the cleaner and the shoe shop owners’ hands. Was anyone really any wealthier? No. Was there consumption? Yes. Did this consumption create jobs for people? Yes.

So money does make the world go around.

But what if the Butcher couldn’t afford to take his wife out to the hotel because all his money went to the mortgage, food, power and the basic essentials for living? Would the hotel have to cut the hours of the cleaner? Perhaps. If that happened would the cleaner still have the ability to buy the shoes for Friday night? Maybe not. With all of those things in play maybe the shoe shop owner cannot host the barbecue?

So I ask with all sincerity, my readers to consider how current home prices are sustainable, to realise the flow on to diminishing disposable income and therefore reduced consumption.

If you feel I am wrong then please post a comment, but be ready in your explanation to SHOW ME THE MONEY!!!!

 

FOR MY REGULAR READERS

Apologies for the big break in posts. My follow up to this blog will be up in the next few days and will address the headwinds faced by the Australian property market. It will provide a detailed look at demographics, Australia’s aging population, pension implications etc.

 As the baby boomers move into retirement phase will they choose to “downsize” their home? Will government policy shift to means test for the pension including real estate holdings force the biggest demographic (baby boomers) to move into a cheaper home? How will the next generation afford it given current stubbornly high levels of youth unemployment?

These are some of the questions I will be answering  along with others in an attempt to show that the Australian households “wealth” may be at risk given much of the wealth is held in the real estate asset class.

Until then, keep the commentary coming and the feedback. For those that find this blog in some way educational feel free to share. You can also follow me on twitter @carneycapital.