Australia’s own sub-prime housing stress

Sharp rises in housing costs have thrown 425,000 relatively poor Australian families into financial stress.

This is revealed in a new report, just released by the Australian Institute of Health and Welfare.

The Institute confirms that most Australian family budgets look bright, with their gross mid-level incomes rising by no less than 34 per cent, in real terms, over the 10 years to June 2006.

But it warns, too, that Australia is a very diverse country, with a very diverse community.

Its report notes, in particular, that sharp rises in rents house prices, over the past decade, have pushed thousands of families, with relatively low incomes, into severe financial stress.

It is widely accepted, that housing costs produce stress, when they exceed 30 per cent of a family’s disposable income.

John Howard made much of his “battlers.” That was one of his favourite descriptions of poorer Australian families.

The Institute looked at what had happened to them, on Mr Howard’s watch. Massaging figures produced by the Australian Bureau of Statistics, it came to the conclusion that some 425,000 Australian families, with incomes somewhere in the bottom 40 per cent, now spend more than 30 per cent of their income each week, on either rent or home loan repayments.

Default levels, on Australia’s home loans, are still low. That’s because Australia’s banks and other home lenders have been much more careful than their American counterparts, in choosing their customers.

But, if the Institute is right – and there is no reason to doubt that it is – thousands of Australian families are, already, finding it very hard, indeed, to keep a roof over their heads.

The Institute reports, for example, that almost half of all Australian families, in this income range, who rent privately, now pay more than 30 per cent of their gross income to their landlords each week.

That might well have had something to do with the outcome of the Federal election on November 24. The result, in fact, might well be seen as the battlers’ revenge.
The report, the latest in a series published every two years, is close to essential reading for financial advisers.

Its available at www.aihw.gov.au. The data on financial stress is in table 8.5.

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1. Sub-prime:Who will pay?

Sharp jump in incomes

Australians have more spending money than ever,with net disposable incomes rising by 5.1 per cent over the past year.

That seasonally adjusted figure, comes fromthe September quarter national accounts, which the Australian Bureau of Statistics released today.

It is just one of many in the national accounts which will worry the Reserve Bank, which only just held off raising rates, yet again, earlier in the day.

The bureau said real net disposable income rose by no less than 1 per cent in the September quarter alone.

But isn’t that a good thing? Well, yes, mostly.

However big surges in income can produce problems, particularly when there is little spare capacity in the economy, a situation the Reserve Bank, itself, says applies now.

The bureau also reported that the Australian economy grew by a quite substantial 1 per cent in the September quarter and by a truly impressive 4.3 per cent in the 12 months to the end of September.

Most economists are now worried that the prospect of the $31 billion in tax cuts, that Labor promised before the election, will encourage even more enthusiastic spending over the coming year.

And they too fear that this could overheat the Australian economy. They are urging the government to find spending cuts, in its own program, to offset that.

The new Finanance Minister, Lindsay Tanner, has promised to do that. His boss, Kevin Rudd, has already promised to take “a meat axe” to wasteful spending in the public sector.

The bureau’s figures also confirm that this is now close to an urgent necessity.

They show , for example, that final consumption spending rose by 1.2 per cent in the September quarter and 3.7 per cent over the year.

It is capital spending associated with the mining boom though, that is really driving the Australian economy. Although it eased by 0.3 per cent in the September quarter it rose by no less than 10.6 per cent over the year.

see www.abs.gov.au for more

Rudd pressures banks

Australia’s new leader, Kevin Rudd, is urging Australia’s banks to not to raise their home loan interest rates.

He was speaking on ABC radio this morning, just hours before he – and other new Labor ministers – drive to Yarralumla  to be sworn into their new posts.

The National Australia Bank, in particular, has warned that its home loan interest rates may have to be raised, to cover the higher costs of funds, incurred as a result of the sub-prime mortgage crisis in the United States.

Mr Rudd acknowledged that Australia’s banks do have a right to raise rates, for commercial reasons.

“That’s a decision for them,” he said.

However he also urged the banks to remember that Australian families are already “under pressure” financially.

“They should be very, very mindful of their customer base,” Mr Rudd said.

This process is known, in financial circles, as “jawboning.”

The main culprits are usually central bank chiefs.

Mr Rudd, though, has set something of a precedent by indulging in a little jawboning even before he officially takes up his new post, as Australia’s 26th Prime Minister.

He was speaking on the eve of the next board meeting, at which Australia’s central bank, the Reserve, will review the nation’s interest rates.

Although the bank’s Governor, Glenn Stevens, is making no secret of the fact that he is worried about Australia’s rising inflation, another rate rise this week is considered unlikely.  That is because the US sub-prime mortgage crisis is already slowing US economic growth.