Desperate “Debt Dependent” Households Might Be In For More Pain

An acquaintance recently wrote about how many Australian households are still taking on more debt, despite a number of technical and anecdotal suggestions that many households are struggling to service debts; substantial cost of living pressure seems to be manifesting to the point of “maxxing out” on their ability to meet obligations (including bills)…perhaps this is also the case in other countries?

Instead of reducing debt, selling-up, moving on, cutting back where possible (what I would call “rational” behaviour) there is evidence desperate households are seeking other lines of credit (debt) to subsidise – or just meet – the currently characteristically indebted situation.

Now, aside from being economically “irrational” in my honest opinion, it is certainly a desperate and difficult situation. What of the human toll in the short term? In the long term? I really feel for people here…

However, getting into more debt to cover previous debt requirements is tragic on every level, and cannot end well. In all honesty, it is probably better in the longer term to “cut your losses” now, and minimise the fallout later.

“Irrationality”, economically speaking, erodes the situation one operates within fundamentally; and it is certainly not an issue of “rational” being all “intellectual” and clever, but simply knowing when it is better to “get out” with your life, so to speak, rather than forfeit it to someone else….more a figurative aspect in many Western peoples’ lives, but certainly a literal outcome for many in the world…

If you’re interested, I wrote a little more in response to my acquaintance, regarding the “triple whammy” effect that households, determined to “not get left out” of the Australian housing market, can face by “just getting in”; I’m sure many international readers could relate to what is experienced and expressed in the following…

It might also be worth mentioning to them that are “desperate to get into the market and then upgrade later” the effect that inflation has on the real value of their property in the future and their wage.

…AND, that if we (Australia) have not entered a “significant enough” deleveraging stage like Europe and the USA, then our central bank will be chasing inflation with interest rates…

So, in real terms for the FUTURE value of money, it’s a triple-whammy for the future financial position of a household pursuing the elusive “dream” of a house (or, rather, a really big, slave-like mortgage):

i) Inflation eating away at any future capital gains (if any)

ii) Inflation eating away at real wages that probably won’t keep up with inflation for the time being (my guess…)

iii) Interest rates (via RBA inflation “chasing”) going up for the time being and making mortgage servicing more difficult in real terms…AND…further reducing the likelihood of any NET returns on the “investment”, from a future “i want to upgrade later perspective”; this is effectively a “loss”

(i) and (ii) make (iii) just so much worse…too much is assumed for me to be comfortable with households “getting in while they can” for the reasons too-commonly cited at the moment.

An all too familar scenario in Australia at the moment, and one i’m sure has been (or still is) very familiar in other economies around the world.

…Sigh…

Stewart

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4 Responses to Desperate “Debt Dependent” Households Might Be In For More Pain

  1. Chris says:

    I’m amazed how people seem to chase the debt in this country. We have a household income of about $125,000 gross with 3 dependent children. In the last 2.5 years we have reduced our debt from $86,000 to $24,000. It has been hard work, but we should be clear of all debt by Sept next year. This has left us with little spare cash. The reason I’m mentioning all this is how do you repay a $300,000 plus mortgage and raise a family, go on holidays, buy a car and repair your house?

    • processdude says:

      Chris,

      Good to hear from you.

      I’m with every comment you make there…

      It’s sad really – we’ve become a nation of the debt-addicted, such that we no longer know how to get by without it.

      Your comment, “how do you repay a $300,000 plus mortgage and raise a family, go on holidays, buy a car and repair your house?” has me in particular agreement….i dunno, really….must need to justify a lot assumptions about the present and the future.

      They have changed their tune a bit now, and are almost entirely debt-free, but when lamenting about house prices in (even in!) outer Sydney where my wife and first bought afer we got married, my parents told us, “Debt is just a way of life!” I was never comfortable with this.

      So, how does one manage the lifestyle you described, above? More debt, and a large dose of optimism, i guess….

      Problem is, we’ve all been living beyond our means for so long, with such long “lives” on our loans, that the past debt-servicing has taken so much of what the present was SUPPOSED to deliver.

      Anyhow, great to hear that you’re almost out of debt – must be a great feeling, and will be even better once it’s achieved, eh?!

      My wife and I sold our house in Western Sydney a couple of years ago, anticipating a crisis in housing within the next few years (which seems might now be manifesting), and we underestimated the sheer relief of just not having such an incredible burden off ourselves…and we only had an income of ~$110k/yr and a $275K mortgage…but were still looking at ~25 years to pay it off with the interest rates what they were then (and we were living simply!). Never again, no way!

      I’m a bit funny these days with my poor family members and friends these days….as thoughtfully and gently as I can, I try to talk them out of their current debt positions, or getting out altogether; partly due to the “unwisdom” so to speak, of the magnitude of common debts (particularly mortgages, but also personal loans), and partly because I think that servicing debts will become far more difficult to cope with, before it gets better.

      Well, I rambled again, but I appreciate your all-too-true input.

      Cheers,
      Stewart

  2. Chris says:

    Stewart

    I’m enjoying reading comments from an Aussie site. You can easily get Yanked out, as they seem to dominate the money talk, but there also the brokest!

    One of the big problems with getting rid of debt is that you look like a loser! You have to have a strong character and determination. We literally have foam stuffing sticking out of our family room suite. We do have a 2 year old paid for Maxda 2, but my car is a 1991 Corolla, still saving for the replacement.

    What my wife and I are starting to realise with our 3 adult children is that although we don’t believe we ever indulged them, at the same time they never had to go with out anything or wait for the money to turn up. This has created in one of them a very selfish disposition, much to our disappointment.

    I would advise any new parent to live as if you can’t pay the bills (although you can) for the benefit of your kids attitudes towards life!

    Chris

  3. Pingback: Two Million Aussies in “Poverty” « Angles on Economics

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