Our " Creaking " Economy !

In the Australian mindset, owning the home we live in has the highest priority in terms of financial success.  In the past, many people jumped into the market with a mortgage that was barely within their capacity to service but safe in the knowledge that house prices were ever rising and demand was frenetic.

House and unit prices have retreated and that comfort zone is shrinking.   The number of delinquencies in repayments of mortgages on mortgage backed securities is increasing and Moody's reports the rate increased to 1.58% from 1.48% just three months earlier.   The option of putting the property back on the market and getting a quick sale that delivers a profit is fast fading.

One of the hopes for those with mortgage distress is the vast array of first home buyers eager to get into the market and the tendency of the banks to arrange a loan for those with a far lower deposit than was previously required.   That depends heavily on what the proverbial crystal ball has to say about the future of our economy, and there are some worrying signs.

We are certainly living beyond our means.   Household debt seems to be ever rising and is now at about two hundred percent of  annual disposable income.  The retail economy is becoming based on the " buy now - pay later " concept of long debt holidays.  That leaves a lot of people very vulnerable if we encounter even a mild recession.

What worries some economists is the tendency for the Reserve bank to use lower interest rates to stimulate the economy  In theory, lower rates puts more money in people's pockets and allows them to spend to increase the jobs market.  In reality, few change the amount going to mortgage reduction because of a rate decrease and therefore the situation changes very little.

What is alarming is that the market has priced in two more rate reductions this year and we may end up with the cash rate at 0.75 percent.  Without the salve of a rate reduction, the economy is left with the only option for relief based on deficit spending by the government.  That is a debt that will have to be repaid by future generations.

One of the indications of the softness of the economy is the passenger numbers for air travel between Sydney and Melbourne.   That is one of the most travelled air routes in the world and it is heavily dominated by business travel  and this has experienced a 3.8% drop in the past year.  There has been a similar fall in new car sales in this country.

The price in homes and units is probably the best indication of how the economy is travelling.  It has certainly slowed marginally but is generally holding up well.  The danger seems to be from a rush of first home buyers taking advantage of lower deposit loans and thinking this reduction in asking prices will soon revert to the former galloping increases.  That could cause a price panic if a lot of new entrants get in over their heads in debt and fail to service their loans.   A rash of home repossessions could send the market into a tail spin.

 So the question is - Are we heading into a recession ?  That probably depends on the outcome of this tariff war between America and China, but mini recessions seem to be cyclical and it is inevitable that we will encounter some sort of downturn in the years ahead.

What we would do well to remember is that most recessions are caused by panic.  Ordinary people lose confidence and act irrationally and the market crashes accordingly.   The problems facing the Australian economy are very manageable and there is every expectation that it will travel well going into the future  !