Are These the Winds Before the Hurricane?

re: “Consumer debt rose to record level in the June quarter…”

I was inspired to write a little blog entry after reading this article, from http://money.ninemsn.com.au/article.aspx?id=7985456&rf=true :

Consumer debt rose to record levels in the June quarter as defaults on commercial leases increased in spite of improving economic conditions, debt agency data reveals.

Consumer debt rose to record levels in the June quarter as defaults on commercial leases increased in spite of improving economic conditions, debt agency data reveals.

Credit reporting and debt collection agency Dun and Bradstreet (D&B) says the latest average value of referred debts, which edged above the $1,000 mark in June, is now at its highest level since 2006.

The figures have sparked concern that Australia may need to brace itself for a wave of personal bankruptcies, with D&B saying referred debts are traditionally the first sign an individual is facing financial trouble.

“Therefore, it’s expected that more extensive financial difficulties, such as bankruptcies, could result later this year and into 2011,” D&B said in a statement.

D&B chief executive Christine Christian said the latest data indicated that the value of “debts referred” had risen to the highest level in four and a half years.

“This type of negative credit event is traditionally the first sign an individual is facing financial trouble and it often leads to a bigger debt spiral,” she said.

“Improving local economic conditions are doing little to stem the tide of consumers facing financial difficulties and further pain could be on the horizon.”

Referred debts are defaults which have been passed onto a debt collection agency.

Data released by D&B reveals that the average time between a first and second default is just 10 months, with research showing a likelihood that consumers with accounts in default, or 60 days past their due date, would face “further credit struggles”.

A rising trend in bankruptcy activity has occurred since 2004-05, with 2009-10 financial year figures up by 50 per cent on 2008-09, the data shows.

Utility debts are up 50 per cent, while telecommunications debts are up 41 per cent in dollar value over the past two years.

The D&B research also found that the average value of debt was higher for men than for women and that people from the Northern Territory, NSW and Queensland had the highest amount of average debt.

Ms Christian warned that people would face problems accessing credit for up to five years after defaulting on bills.

Meanwhile, debt recovery agency Prushka has noted a “significant increase” in defaults on commercial leases over the past six months as the benefits of federal government stimulus measures faded.

Weakening retail conditions are contributing to tenants of factories and shops defaulting on their leases and slow action by managing agents has seen default claims blow out, the agency said.

“The trend was probably caused by a delayed reaction to the global financial crisis in which the impact had been largely shielded by the stimulus measures, helping weaker businesses stay in business for longer,” Prushka chief executive Roger Mendelson said.

He said most managing agents were not qualified or experienced enough to handle defaults and it was up to landlords to take a more active role in property management by quickly identifying claim defaults.

“The longer the default continues, the larger will be the amount outstanding and the harder it will be to collect,” Mr Mendelson said.

He said landlords need to be “pre-emptive” and avoid letting premises to tenants who had a high risk of going into default.

Somewhat unfortunately, this is what I have been expecting prior to a major housing collapse – it may be simplistic, but don’t people in Australia prefer to go delinquent (ie. miss) payments of smaller bills and debts, rather than the mortage?

In general, I believe this is true; hence, this sort of news is worrying: the winds of the smaller bills and debts going problematic before the hurricane of mortage delinquencies and, eventually, defaults and foreclosures?

Pessimistic? Yeah, sorry. But with the highest private debt in the world (most of which is mortgage debt), on the “other side” of the largest economic (resource) boom in Australia’s history, and with much of the rest of the world either suffering or still hooked on “life-support” (stimulus), we are NOT well placed, i’m afraid…

I personally expect these “smaller” types of bills to increasingly go “bad” in the short to medium term; housing mortage finance will continue to plateau and drop off, and, in the medium term, house prices will begin to decline at rates in excess of what they already are in some parts of the country.

Sorry, not a pretty scenario – but this is debt-deflation: sobering up after a big, long party of debt-splurging.

Until next time,

Regards,

Stewart

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