Making Money is easy !!!

Date: March 7 2005

We are seeing the first signs of the pain that will follow a decade of greed, writes Clive Hamilton.

In a previous era, when rich people found themselves in financial difficulty because they were living beyond their means, their plight attracted little sympathy. Today, when the affluent complain about having to repay mortgages taken out to fund extravagant lifestyles, it becomes a matter of public concern.

Thus last week’s interest rate rise has sparked a chorus of whining from wealthy people who believe they deserve sympathy because life is tough.

This newspaper carried the story of a 28-year-old with three properties whose interest bill will go up by $2125 a year after the 0.25 per cent rise in interest rates. That translates into mortgages of more than $1 million, yet he whinged about the “extra burden that young families don’t need” and how he will have to sacrifice the family holiday.

It must be tough being a millionaire unable to afford a holiday.

The papers are full of “ordinary families” saying that the rate rise will make things “that much more difficult”. How difficult is it to live on incomes that have been growing rapidly for more than a decade and are now unprecedented by historical or international standards?

Another paper reported the sorry tale of a Rose Bay divorcee who has borrowed more than $600,000 to live in one of Sydney’s most exclusive suburbs and send her children to private schools and now complains that she won’t be able to shop in Rose Bay but will have to travel “to Maroubra or somewhere like that”. The ignominy of it.

These people need a reality check. They borrowed huge amounts of money to fund profligate lifestyles and want sympathy now life has not turned out exactly as they hoped, even though everyone knew that interest rates would sooner or later rise.

A survey last week found that 28 per cent of Australians with a mortgage said they’d have trouble making payments if rates rose by half a percentage point. Well, that means that 28 per cent of Australians with a mortgage are fools for entering into 25-year contracts while only thinking of the next few months.

We are witnessing the first signs of the pain that will follow a decade of unprecedented greed and luxury fever in which large numbers of Australians have bet their futures in order to meet grossly inflated lifestyle expectations. They wanted it all and they wanted it straight away. This is illustrated by the fact that interest payments on household debt as a proportion of disposable income have now reached their highest level ever.

This has occurred at a time when interest rates have never been lower and incomes have never been higher. The figure is even higher than it was when interest rates were 18 per cent under the Labor government.

For the mortgage whingers this year’s “mortgage stress” is the flip side of last year’s self-indulgence. Ignorant of history and deaf to the warnings, too many believed that the asset-price party would go on forever and that their own position was impregnable. So what was inherently highly risky behaviour seemed safe; after all, everyone was doing it.

The Howard Government has ridden the extraordinary debt binge to resounding political success and has been loath to spoil the party with the sobering advice and policy signals that any responsible government should have dispensed.

As long as it was riding high, it was never going to warn the public that their overspending was unsustainable; that sooner or later spending more than you earn must be matched by earning more than you spend; that the price of one asset – houses – cannot get too far out of kilter with the price of other assets; and that capitalist economies have always been subject to business cycles, and always will be.

The Government has profited from the financial illiteracy of great swathes of Australians blinded by the promise of instant wealth and egged on by tax rules that stimulated massive investment in rental property.

But now the chickens are coming home to roost. For, despite growing incomes and wealth, the lifestyle aspirations and financial benchmarks Australians have set for themselves have grown faster still. As a result, while richer than ever, Australians actually feel more deprived than ever. For those locked in to this way of thinking the psychological impact of interest rate rises will be overwhelming. A recession is unthinkable, but likely nevertheless.

The Government will be under intense pressure to bail out wealthy households in financial difficulty, and it will be the prudent who will be forced to pay for the mistakes of the reckless. This should be resisted at all costs. Not only would it be profoundly unfair, it would send a message to the imprudent that government will save them from their mistakes and they are free to repeat them.

Clive Hamilton is executive director of The Australia Institute, a public interest think tank.

Last bastion of bad debt still to go is $1500 on old C/C and $13880 on old personal loan! Both will be finalised this year to $0!!!!! Despite investing.