Australians are dialing back their spending on everything from clothes to cars as sky-high housing costs, the result of a housing bubble fueled by Chinese buyers, threaten to finally derail the country’s twin asset bubbles - housing and stocks.
But rising mortgage debt isn’t the only thing squeezing Australian customers, as Reuters reports. Inflation on essential items like food, electricity and insurance is accelerating, meaning Australians are also paying higher prices for basic consumer goods.
Australia’s real-estate prices have been rising for more than 25 years with hardly a pause – the last time real estate prices saw a meaningful pullback was during its last recession, in 1987. Reuters reported Tuesday that Australia’s debt-to-income ratio has climbed to an all-time peak of 189%, according to the Reserve Bank of Australia.
While sky-high home prices are, in part, responsible for Australians’ record debt, a sudden drop in valuations would only exacerbate the problem by squeezing those who paid a premium for their homes when the market was at or near the top. Many of these buyers are now saddled with high mortgage payments and little equity in their homes.
"We are seeing a considerable spike in stress even in more affluent households. Large mortgages, big commitments but no income growth," said Digital Finance Analytics Principal Martin North. "Stressed households are less likely to spend at the shops, which acts as a drag anchor on future growth."
North estimates that a record 52,000 households risk default in the next 12 months, and that 23.4 percent of Australian families are under mortgage stress, meaning their income does not cover ongoing costs. That compares with about 19 percent from a year ago.
"People are up to their ears in mortgages," said Brad Smith, a car sales consultant at MotorPoint Sydney which has seen a stark slowdown in sales in the past six months. "They are all on a budget. Everyone's got all their money in houses, that's how it is."
For an economy that has achieved a remarkable winning streak – it has avoided a recession for more than 25 years – circumstances are looking bleak.
"As the housing market slows, we see consumption growth as a major risk amid record-low wages growth and ongoing headwinds to discretionary cash flows," Morgan Stanley economist Daniel Blake said.
Retail sales have hardly grown in the past few months. Even online sales have slowed, with all major categories including homeware, games and toys, daily deals and takeaway food shrinking in April, according to the NAB Online Retail Sales Index. Car sales have flattened this year after solid growth in 2016 while sales of luxury cars and sports utility vehicles are at a four-year low.
For consumers like Sydney resident Marie-Aimee Guillermin, there's little 'play money' left after stepping into Sydney's housing market with a A$1.4 million 3-bedroom house last month.
"We thought once we had the house we could take our foot off the brake a little bit but now that we have it I feel even less certain in terms of stability and financial security," she told Reuters.
"So whether we'll end up spending a bit more on clothes and restaurants and going out and what have you I don't see that happening."
Stock valuations have gotten so out of hand that one firm, Altair Asset Management, made the extraordinary decision to liquidate its Australia-focused fund and return "hundreds of millions" of dollars to its clients.