Posted: September 10, 2006

The dark side is coming!

Increasingly we read in the local news that mortgagee in possession auctions areon the increase in our major cities, particularly Sydney. Mortgagee in possession auctions simply refer to the bank or finance company taking possession of a person's house after the person has defaulted on their debt repayments. The bank then tries to get what it can for the property and sometimes (often) leaves the person with residual debt and no property when the forced fire sale doesn't yield a price sufficient to wipe out the residual debt.

These sales are the manifestation of financial fragility brought on by excessive debt build up in the household sector driven by Federal budget surpluses (squeezing household liquidity and running down household wealth) and overzealous financial engineers who know no tomorrow when it comes to forcing debt onto vulnerable households. I have written a lot about how the 'growth dream' of the Australian economy in the late 1990's and beyond which was promoted by the Federal Government as being the product of their 'prudent fiscal management' (budget surpluses) was always unsustainable and was basically a con job. Now we are seeing the results of this fraud.

In a Sydney Morning Herald article by Kerry-Anne Walsh and Michelle Singer (September 10, 2006) we read that:

SYDNEYSIDERS are losing their homes at a record rate, forced out by crippling mortgage payments, exorbitant petrol prices and high personal debt. ... The latest NSW Supreme Court figures show repossessions by financial institutions are approaching an annual total of 5000 - more than twice as many as three years ago. ... In 2002 there were 2189 repossessions after defaults by borrowers. In the 12 months to March the figure was 4873 - more than double the rate under Paul Keating's 17 per cent interest rate regime in 1990. ... Sydney real-estate agents have reported a sharp increase in repossession sales after home loan interest rate rises in May and August. Since 2002 there have been seven official interest rate rises.

Local real estate agents are also reporting an increasing number of default sales on their books. The dynamics of financial fragility are relatively simple. People begin a new growth phase cautiously - both banks and borrowers. Then confidence builds and the financial engineers start pushing more and more credit onto the household sector. Housing prices are rising and renovations and consumption of household items are booming. Loans get bigger and are pushed onto more marginal borrowers. The debt servicing burden as a percentage of disposable income rises. Then things start to slow in the housing market and people attempt to restructure their private balance sheets to reduce their extreme exposure to the slightest change in circumstances (like an interest rate rise or a spell of joblessness). Then it starts to unfold.

If you add in the fact that the Federal Government has been squeezing household liquidity for 9 out of its current 10 years in office via its obsessive pursuit of budget surpluses. This fiscal drag is continuously draining purchasing power and forcing households into ever increasing levels of debt to maintain their wealth generation.

If you add in the fact that petrol prices have skyrocketed, partly due to the massive tax impost imposed by Federal Government. The costs rises have further squeezed the household budget.

If you then add in the rising unemployment and declining employment growth in South West Sydney due to a collapse of the manufacturing sector. This has been accompanied by the end of the property boom which is now seeing some households holding negative equity in their houses.

If you then add rising interest rates driven by the Reserve Bank's obsessive pursuit of low inflation at the expense of unemployment.

Put all these factors together you have the recipe for collapse. Most of this could have been avoided if the Federal Government had have avoided budget surpluses and maintained a full employment spending regime and ensured the Reserve Bank did not see unemployment as a means for maintaining price stability. Households would not have been squeezed as much and would not have been pushed into debt.

A local real estate agent was quoted in the Sydney Morning Herald article noted above as saying:

The market had slumped by up to 25 per cent in some pockets of Sydney, which had added to the panic in the market. People who had borrowed heavily to buy a $400,000 property just a few years ago wouldn't sell it now for much more than $300,000.

The SMH journalists report a case study to two to document their story. They say:

At Annandale, a "mortgagee in possession" house, bought 18 months ago for $750,000 was up for auction. But only a handful of interested parties went looking for a bargain ... The ... home passed in at auction without attracting a single bid. Before the auction ... [the agent] ... expected the three-bedroom, two-bathroom strata home to sell for about $550,000 ... Afterwards, a potential buyer offered a mere $330,000.

What we are now witnessing is the folly of the Federal Government's fiscal and monetary stance. The situation will get worse as the multipliers work their way through the expenditure system. The rule that the Government has violated at our expense is that if you want the private sector to save the public sector has to be in deficit. That is the foundation of full employment and a sustainable growth path.

Blog entry posted by bill