Post Code 2570 is flashing a bright orange warning to migrant Irish healthcare workers. The warning indicator isn’t coming from highbrow economic ratios, but from something healthcare workers intuitively grasp: a marked increase in social stresses. These can presage red warnings, economic data that signals imminent ruptures. Orange warnings are ignored at peril, much like a grumbling appendix or, in the case of Ireland, young parents driving the N7 at 6:30am with toddlers ready to be dropped off into over-priced creches, asleep in the backseat while Mums and Dads fret over mortgage repayments on inflated houses. RTE’s Rip Off Republic explained why and how “Ireland was eating its young” three years before the burst, the social warnings were in plain sight.
Postcode 2570 isn’t unique, it is rather a, quintessentially, new Australian middle-class area. Nothing to see on the surface, or so it seems. This is an area 28 miles southwest of Sydney, sprouting out of the quaint town of Camden and includes the lands around Oran Park, which used to stage the Australian Grand Prix before giving way to development. Situated in the MacArthur region of New South Wales, this is modern Australia, nice houses on their own plots, a commuter town to Sydney. Houses aren’t cheap, the median price is a little over AU$750k (about €470K in our money), but a lot more affordable than in Sydney, which will set you back a cool million. It’s easy to see why it’s popular, for cost of an apartment in Sydney you will get a nice house here.
What makes Post Code 2570 interesting is localised analysis from Australian economist John Adams and banking expert Martin North. A headline from a local police report commenting on a spike in domestic assaults caught their attention because, in police interviews, perpetrators of “domestics” identified financial stress as the root cause of their misbehaviour.
This got Adams and North digging. The increase in local domestic violence in post code 2570 is up over 86% in six years and it is gathering momentum, this contrasts sharply with a fall nationally of 0.69%. It is mirrored by a 50% rise in intimidation, harassment and stalking, compared to 0.54% nationally. Drug offences over the same period have climbed threefold, that is eight times the rate nationally. Although further research is needed to establish causal links, but a correlated picture emerges from economic data.
Nationally, upside down mortgages, where debt exceeds property values, is touching one in six home loans, but in Post Code 2570 it is touching one in every two. Negative Equity is the new game in town. Mortgage stress, measured by cash flow strains, is affecting 40% here, which is why loan sharks, high interest short duration lenders, are migrating from social welfare customers to distressed low to middle income earners with on-line offers. These emergency credit lines are being accessed by 15% of households in the area. It is not just mortgages that is causing stress, rental stress is touching one in two, something that Irish migrant workers need to factor into calculations about living on what’s left over.
National averages can mask localised economic strains in newly developed areas like Post Code 2570, but its residents are unlikely to be any different to similar areas in Australia and the cause is easy to trace.
Many houses were bought here for less than 10% down payment using mortgages ranging 90% to 95% of house prices close to the peak of Australia’s roasting hot property market. That cycle is now in decline with Sydney prices already -11% from peak, slow sales, quiet auctions and tighter lending rules. This is leading to a reduction in new credit which, at -6% in December, is three times worse than forecasts. It is an iron rule that house prices follow credit shrinkage and the deterioration appears to be accelerating.
So, what could happen? Nothing is written in stone, Australia may yet escape with a slow deflation of its bubble, or it may not. What’s at stake, much like it was for Ireland, is an economy afloat on a feel-good wealth effect, sustained by year on year rises in house values. Even if your income is stagnant, but your balance sheet is rising every year, you spend more, take on easy credit and follow the herd, breakfast at the local cafe paying for premium coffee, avocado & toast. Australia has become a service-led economy, four of its six biggest quoted companies are banks, two are mining companies. The service economy is built upon sustained house prices, pull that away, especially if Chinese demand for resources dries up due to China’s own debt bubble, and the real question is, what does rock bottom look like?
Buyers, expecting further price falls, sense blood in the water and are holding off in a self-fulfilling prophesy. A recent report from UBS Bank has the rattled soft-landing hypothesis by estimating price falls of -20%. The big banks in Australia have cause to worry about their vulnerability, much of their home loans are on interest only payments, as high as four in ten, meanwhile the political establishment, which stood over so-called negative gearing tax relief, has much to lose. This is Government rocket fuel that encourages speculation by allowing taxpayers to write off any negative gap between interest costs and the costs of owning investment property, including depreciation and related expenses, against tax on ordinary wages.
Add in housing grants for first timers and stamp duty exemptions up to AU$650k and the political establishment has lots to defend if Australia experiences one of the worst hard landings in economic history. It may not, neither may Canada and many other property markets who escaped the GFC, but ingested misallocations of cheap capital caused by extreme global quantitative easing.
The race is on between deteriorating conditions in places like Post Code 2570 and the potent Australian antidote of GDP growth, employment gains and immigration, but, for those already in the trap, life will be a lot different, the social and political consequences yet unmeasurable.
One thing is clear, any newly qualified son or daughter getting on a plane to work in Australia needs to keep the return ticket, understanding that there is no such thing as a free lunch, what rises, falls and that this time it is no different.
14th February 2019
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