Skyrocketing Debt

thanks brent. it would be great to get everyones view on this. can we keep ignoring the warnings? My fear is that people dont regard property invesment as a ‘market’ – but a entity that always increases.

does anyone else have serious concerns??

rgds

An interesting piece Brent. But it poses more questions than it answers, eg:

1. Why compare debt to income? At first sight a figure of 110% sounds alarming, especially when compared to 54% previously. But isn’t comparing debt with income comparing apples with oranges?

2. Some more figures would be helpful. The flip side of debt is equity. The difference between the two is net worth. What has happened to people’s net worth (diff between debt and equity) since 1993?

3. Debt servicing abilty it important. A debt of 100% of annual income sounds scary, but at 6% interest rates, it takes only a small amount out of your pay. Thus serviceability can be manageable, provided interest rates remain low and people keep their jobs.

4. What is the composition of this debt? If it’s mostly on depreciating items or to live above one’s means, then yes it could be a worry. Debt payments mean that you can’t maintain spending without incurring more debt. Therefore people need to cut back and the macroeconomic effect is a recession! Debt driven consumer binges are therefore not sustainable.

If the debt was incurred on a cf + property, your income has increased by enough to make up for this, so serviceabilty is actually improved and I have an asset to show for the debt. But if enough people get onto the property bandwagon, so investors dominate the market, property could become more volatile.

If investors get into shares again, and don’t buy IPs as much as they are now, property prices could fall (assuming stagnant demand from owner occupiers). We have not had this due to immigration, births and the declining household size, but this could happen in the future.

Investors (esp though who borrowed 90%+) could even face negative equity. Especially in things like tiny student accomodation, some inner-city apartments and country places with zero pop growth that are currently the flavour of the month for cf+ investors (eg Tasmania).

5. What is living within one’s means?

For years I gradually built up my investments and borrowed nothing. Then this year I bought an IP (a cheap cf + place with 9% rtn). Serviceabilty is fine as it’s cf +. Though I paid 25% deposit, my debt went from 0 to 200% of annual income. My debt to equity ratio shot up from 0 to 33%. I have a self-imposed limit of 50% (ie to borrow $100k, must have $200k assets) which will allow the purchase of IP #2 shortly.

By the standards of many on this board, I have taken an extremely conservative approach (you say timid, I say prudent!). I don’t know how my debt:equity ratio stacks up with the Aust average. But by the standards of that report, my level of debt (especially when compared to income) is very high!

Peter

Gday,
It’s not mentioned in this article but servicability is becoming a problem among borrowers in Australia because most of this debt is being used to fund lifestyle rather than wealth building assets.
I too had fallen into this trap, but fortunatly woke up before it was too late![]
Now one of my goals is to reduce my personal debt by at least $250 per week, regardless of other needs or wants. So far so good, I usually pay more off.
Another thing that I do now is only use my credit card when purchasing by phone etc, and only spend an amount that I can pay straight off.
I’ve also created a strict budget that I follow rigidly it includes saving 10% of my wages. Hopefully all these things will teach me better finacial habits.[8D]

Cheers,
Scott S

“Aim for the stars and you’ll shoot the top of the telegraph pole. Aim for the top of the telegraph pole and you’ll shoot yourself in the foot!”
-anon

Hi…

In terms of viewing IPs as a market, I recently went on a shopping trip and bought a few… I think I did okay, because they were houses weren’t too expensive, for either me to buy or the tenant to rent, they were in good nick, and won’t require too much maintenance. To me the investment decision is quite low risk, and they will be cashflow positive… with locked in interest rates for 4 or so years they are not going to be too much of a financial burden just at the minute…

What worries me is the people who take the big, thoughtless risk… like buying some of those overpriced apartments at Docklands in Melbourne, many of which are sitting empty, because a lot of people thought it was going to be a great idea… it’s basic oversupply of the market and was always going to be the case! There’s only so much demand to cater at certain prices isn’t there?

I have always lived within my means, and even though I now have a slowly growing property portfolio, I will always think things through before spending a buck. (There’s a difference between being careful with money, and being a tight a*se! At least, that’s what I reckon!)

Unfortunately, a lot of my friends who have earned, and are still earning very good money, have very little to show for their efforts, and are going to struggle to get into the game, even if a correction in the market takes place. In Melbourne’s case, I think prices will level off… not fall drastically…

r

My two cents worth.

I guess if people don’t want to invest for their future, myself and everyone else on this forum will only be too happy to help them when they need vendor finance or even a simple roof over their heads………at least there’s someone out there ready to catch people when they fall off the rails!!!

Take care
Dave []

Hi APIM

I guess on the face of it this tells me that most Australians are going backwards!!!

As Steve says, we need to get out there and spread the message of positive cashflow investing. There’s plenty out there for everybody………

Take care
Dave []