Our very own Big Short in the making? 40% of all new owner-occupied home loans in 2016 were Interest Only facilities!!!

This RANT is a mix of commentary from a ‘much smarter’ man than I along with my own observations. It’s timely & eye-opening. Enjoy.

There’s a growing disconnect between the real economy and the market that you hear about – both here and across the globe. Economic ‘growth’ in the US, China and Australia has been primarily created by the creation of more debt!!! Public & private debt. These three countries are not alone by the way.

Australian households are at their highest ever recorded debt level – with an average of 190% debt to income. BUT let’s dig a little deeper – approx 31% of households are mortgage free (and have little other debt; about 33% of people live at home with the folks or pay rent & have no mortgage.

The rest of us … the 36% with a mortgage? We blow that 190% completely out of the ball park – especially if they’ve purchased a home in Sydney or Melbourne in the last 2-3 years!

No matter what you’re told elsewhere … please take note here: every single dollar of Australia’s “economic growth” has been created via $4 of extra debt! Sadly – none of that ‘growth’ came from more/better jobs or improved productivity.

As I’ve said countless times over the past few years – right now in the US the people who are ‘middle America’ – they’re in strife. In their ‘real world’ it just gets worse!

For millions of people in the States, life is heart-wrenching. It’s difficult to keep a decent job & if you have one wage freeze is the norm. Homelessness is affecting more & more average people – anecdotal evidence suggest that 71% of people now on the streets – had their own home before the GFC.

It’s a land where unemployment is more probable than not. Where daily ‘life’ means skyrocketing under-employment is made even less palatable by continually increasing household costs. Did you know that the average annual household income in the States today is $4000 a year less than it was in 1999.

More US citizens than you realise have menial jobs paying $8 an hour or less. To get by, feed the family & make ends meet they hold down 3-4 or 5 casual jobs and live in motel rooms – rooms that you and I would never, ever spend even one night in! These people can’t afford the bond or rent on a standard family home or apartment … in the US I’ve seen 200 people living in a park in Houston, Texas & 50 or so living in shopping trolleys in Honolulu. And 7500 people live on the streets of SanFran every single night.

But – go figure – their stock market is currently overvalued by 91%.

You’re being told (brain washed*) that their economy is coming out of recession, going well or that things are improving. That’s simply BS designed to fool you. So you’ll borrow more …. * you’re being fed the same garbage here too. The lowest interest rates in Australia’s short history = an economy on the brink of self destruction.

Basically the average American citizen is not ‘feeling the love’ that media and Government would have you believe. However, one day soon sentiments will shift & the economy will matter again.

When it does, the ‘shit’ will hit the fan. The US share market is in dangerous territory; investors aren’t buying “value”. They’re buying into an illusion – that can only be sustained by the ‘bigger fool theory’. Gotta run out of fools soon heh … most investors can’t see that they’re being lured into one of the greatest bear traps in history. Half the American people haven’t got enough cash to invest & the other half stand to lose it all! Speculation & Gambling: same thing spelled differently.

When this bear trap is sprung, the fallout will be as far reaching as it will be devastating – and definitely not confined to the US, China …. or Australia.

Australia’s overvalued residential property markets will be hardest hit. Those households currently hanging by a thread will finally ‘surrender to market forces’. What’s that mean? Selling for what they can get … hopefully enough to clear the debt.

I’ve seen it all before … it’s not pretty & definitely not fun. Don’t believe me? One of the most concerning statistics I’ve ever seen was earlier this year – where 40% of all new owner-occupied home loans in 2016 were set up as Interest Only facilities. This is the place they call home; where memories are made.

Zero debt reduction. They’re just renting the money! Sounds more like a nightmare in the making to me ….

Look – here’s what actually happens when that brown stuff hits that fan. If the bank gets involved, then ‘forced selling’ of a property creates its own momentum … the lower house prices go, the greater the loss of owner equity. Which is contagious because if John & Alice had to sell the 4 b/r x 2 bath home they purchased across the road for $1.35m back in 2015 … selling for just $800k – guess what yours is now worth? In the eyes of your bank, their valuers and the vultures looking to profit from your speculation/misery.

Households that once thought they had sufficient buffer, now become marginal. Or worse.

Pressure builds on many speculative debt-fronts.

The extent of Australia’s obsession with debt funded property speculation* was made evident recently on the Gold Coast. *it’s definitely not investment. A couple sold their home for $1.7 million. The Sydney based purchaser intends using the home for holiday purposes. The agent said their $1.7m plus stamps and costs was borrowed against the equity in three (already mortgaged) Sydney properties.

WTF – this is certifiable madness. There’s no thought about of ‘what if markets correct?’ Which Sydney’s will do in due course. In the midst of a boom, people forget the age-old investment rule of thumb: ‘equity is temporary, debt is permanent’.

When equity is lost, the LVR (Loan to valuation ratio) rises and bankers get nervous. Don’t just take my word for it; this is an extract from a speech given by former Reserve Bank of Australia (RBA) Governor, Ian Macfarlane, in late 2006…

‘…any boom built on rising asset prices financed by increased borrowing has to end. ‘The further asset prices rise above their intrinsic value, the more likely it is that a reassessment will be made and they will stop rising.

At this point, there is a “rush for the exits”, as everyone wants to sell before prices fall. ‘The situation is usually made worse by banks wishing to call in loans, or refusing to roll them over, as they react to falling collateral values.

‘This is the classic dynamic of an asset price boom and bust such as that which occurred in Australia.’ Even the central bankers don’t heed their own advice.