Australia’s next boom: Debt collection as mortgage stress bites

One of the ramifications of Australia having one of the world’s largest household debt loads, which is running at 190% of disposable income:

Is that when wage growth is anaemic and an economic downturn hits, it leaves highly indebted households exposed to bankruptcy.

With this background in mind, a new report from industry research firm IBISWorld predicts that debt collection will be the next boom sector for Australia as the economy slides:

IBISWorld senior analyst Jason Aravanis told news.com.au this industry will perform strongly when, well, there’s debt to collect.

“When the economy starts to slow down you’re likely to see more households defaulting on their debt and businesses hire more debt collectors,” he said.

“It’s certainly not a good sign.

“Australia might be particularly exposed to this trend because our household debt is very high compared to disposable income — it’s at a record high of about 190 per cent right now.

“The problem with having really high household debt is it becomes very difficult when you’ve got low wage growth like we do right now.”

By far the largest component of Australia’s household debt is mortgages, whose outstanding debt was a record high 140% of income as at March 2019:

According to Martin North, Mortgage Stress hit record highs in June, translating into more than 1,063,000 households across Australia, and nearly 71,000 at risk of default in the year ahead:

Record high debt, real wage falls, and a weakening economy are a toxic combination.

Comments

  1. AFSA stats on Bankruptcy and Debt Agreements are down significantly. It’s the one bit of data that doesn’t align

  2. Next boom will be the rectification work for all of the buildings that have been erected in the last 15 years. The flammable cladding and building defects rectification will keep construction workers employed for years to come.

    • proofreadersMEMBER

      Planned building defects cascading like planned obsolescence – how good is Straya.

    • Sure thing! check out SRG, they recently acquired a company called Gallery Facades, who is doing a roaring trade, excuse the pun…. could be good investment.

      However this article got me thinking CLH could be worth a punt – anyone following CLH ?

  3. Job losses in construction, Telstra, Deutsche Bank and retail … looks like John Adams’ predictions may come true

    • (Will not May), I told John instead of marching around on his crusade “tell the people the truth”, they should be giving you reasons why the bubble won’t burst
      I’d actually like to hear the reasons, could someone tell? I’m really curious

  4. Interesting to see Steve Keen say that automobile purchases are a legitimate use for credit. I never thought I’d see him become a debt-peddler encouraging people to borrow to buy things they can’t afford. Does he have a plum job lined up at Audi I wonder…?

    • C.M.BurnsMEMBER

      an expensive item that would take years of post-tax savings to accrue that for many households is essential to earning a living and/or keeping the family functional (school / sport etc) drop offs.

      of course it’s a legitimate use for credit. note that he doesn’t say you have to buy an expensive car, or even a brand new car.

      • True, but you deserve that Range Rover. If you are going into moar debt, do it in style.

      • Nonsense. Get on a budget, save the money, buy a used car for cash. Or be left permanently potless because you always have 2 car payments instead of investing. Honestly, it’s a society full of debt addicted morons.

  5. In Links this morning hm520 gave a credit card anecdote and doctor commented on foreign students with $30k cc debt. Surely non-citizens and even dual citizens are a flight risk. Are there data on debt by citizenship category?

    • probably half or more of Australian population has dual citizenship but not all are riskier because of that
      there are few million recent (last 10-20 years) immigrants (most with Australian citizenship) who would benefit without loosing much from leaving the country in case of bankruptcy situation. And large number of them would be impossible or extremely hard and expensive to find in their home countries.

      my guess is that if it gets really bad here (prices fall >50% and unemployment hits >10%) more than million people would leave Australia (mostly foreign “students” but also large number (hundreds of thousands) of citizens and permanent residents running away from debt collectors)

    • All indian descendents are flight risk. They all have OIC (Indian Oversea Card) and can enter India anytime without a Visa. This is the real next boom when the economy turns and those Tarneit, Cranbourne mortgages are not going to be paid. Good luck with chasing them in India.

      • Is the OIC card how they can obtain citizenship here and still keep ties to India? I note that India and China do not allow dual citizenship, so if the vibrants want to be citizens here, they need to renounce their previous connections?

      • SnappedUpSavvyMEMBER

        I employed an Indian who before leaving the job and country unannounced bought as many lap tops as he could on credit. I still get debt collectors ringing now at least 5 years later. One debt collector told me this is very common.

      • Yeah it’s an OCI card. Operates more like a permanent visa to India. You still need an aussie passport, but it basically looks like another passport and the visa never expires. Got one when I renounced the Indian Citizenship, it’s almost part of the process of renouncing citizenship, they just give you another form to roll you on to it.

  6. I was of the understanding that debt collectors bought the debt, then collected it (not just got paid wages to collect). If this is the case, isn’t a lot of bad debt harmful to the industry?

    • C.M.BurnsMEMBER

      depends how cheaply they buy the debt (ie, how many cents on the dollar it costs them). But ultimately yes, you’re right.

      Also considering that given two debt burdens: a mortgage and then other/personal debt, if a household has to through necessity only pay back one, they will choose the mortgage nearly always.

      • They buy for cents on the dollar and tack on a whole bunch of fees. They know how much they’ll recover in aggregate across their portfolio. It’s just maths.

    • ATO are very quick off the mark with selling their debts.

      The dabt collector is thereby armed with ATO penalties in addition to kneecap altering devices.

  7. Obviously RBA is trying to stop this with their interest rate decreases.. but seriously, what is 0.25 or 0.5 going to do when these people have been relying on 10s of thousands equity withdrawals to keep afloat? As it is, the transmission mechanism is broken, banks only pass on part of the cut. And even a rate cut is being seen as a bad sign by the consumer now.
    Their only hope is to simultaneously awaken the animal spirits one last time with APRA helping, to have fresh meat take on some of this debt and spread it across more of the populace.
    Unemployment, that will be a huge teller over the next 6 months and the HEM rules that will be an anchor. This must be what that “stabilising” period for other countries, before a next leg down must feel like. Plus, then, there is the U.S. recession – Fed is starting to see it too.
    I’m not seeing any sustainable house price rises. In fact, I think it will be as disappointing as the tax cuts we just saw and will fizzle. Like someone else said in the other article, first time MB is being too bullish. But hey, once bitten, twice shy. The housing market has pulled some serious “bunny out of the hat” stuff in the last 10 years that probably also felt exactly like this and took off based on the power of captured regulators. But it’s like the boy who cried wolf, the regulators have been jumping at each shadow and don’t quite understand a wolf can’t be tamed when it finally shows up at the door.
    This time, we’re already 15% down on values in Sydney. I just checked the valuation of the place we are renting currently, good part of Sydney that is good schools, transport etc, and it’s gone from 1.8m+ back in boom to 1.4 (over 20% down). So we’re in a different starting place right now on household wealth to provide a bouncing pad for house prices.
    I am still waiting for the day that the banks stop considering existing equity as real money for deposit for another place. I think the lending conditions are way too lose until that gets tightened. Right now, we’re only seeing them examine expenses and something about mum&dad deposit not being seen as a saving.
    When will the existing equity you have in houses be discounted to account for the continual fall in house prices so money that doesn’t exist can’t be used to inflate prices? Offcourse one day, it will all just deflate all at once, when people realise it. Until they start recognising this money is only on paper and doesn’t actually exist, I think the bubble will have some float left in it.

    • LabrynthMEMBER

      Yes, accessing equity of a house should trigger a capital gains event.

      This way people can use their equity that they have paid for through previous repayments not just above inflation price rises.

      To deal with offset accounts APRA can ask that interest rates on any offset account is a full 1% higher than their Principle and Interest counterparts.

    • The very fact that the economics ‘profession’ think it’s entirely legitimate that the economy should be underpinned by people spending illusory wealth gains (from property revaluation) speaks volumes about how tenuous things really are.

      Real wealth is gained from working hard and/or creating value through growing a business. Everything else is just paper profits (fake wealth).

    • Everyone’s turned bullish on housing. Roger Montgomery, who as it turns out just bought another place – clearly talking his own book and these guys will benefit too running a hedge fund and cheerleading interest rate cuts. Everyone talks their own book.

  8. I’d love to see the stats on how much crap people have bought on finance from places like HN to fill up their overpriced sh1tbox apartments.