Feeling The Pinch?

So, how are your finances looking right this minute?

A bit of a shock now that you have seen your Christmas credit card statement, the most recent utility bill and the school fees for this year? And Lord help you if you have children in day care.

If you are feeling the pinch right now, you aren’t alone. The pollies, economic-egg heads and the newspapers want to babble on about how great Oz is doing; but we mortals on the ground know that things are bloody tight.

If you can afford the ‘luxuries’, then things are pretty great, but for most, just paying for the ‘essentials’ is getting harder by the day. The table outlines the growth in the price of basic ‘essentials’ and some ‘luxuries’, compared against wages over the last five years.

While these results may not reflect every household’s experience, they do give us a good guide. And one we can compare over time. The table importantly highlights mortgage payments and it shows how the pressure of cost of living has been much reduced if you own or are paying off a house.

Since December 2011, rents have gone up about 11%, the price of new homes for owner occupiers has risen by 15% (a luxury item), while the cost of mortgage payments has fallen by 26%.

The ABS estimates that, on average, about 12% of weekly household spending (at present) goes towards mortgage payments. So, the recent falls in interest rates have greatly improved those households’ cost of living, increasing the disposable incomes of many home owners.

And disposable income is how one’s borrowing capacity is determined. And borrowing capacity has helped to determine house prices. Some have confused this ‘money gap’ between the asking price of a property and their borrowing capacity, as the test of a property’s value.

When the property price is less than their borrowing capacity, many – too many – think that the property is undervalued. And when several buyers are in the same situation – think baby boomers at an auction, for example – they bid up the price.

So I have some end thoughts:

• Investment property value should be determined by rental income, not borrowing capacity
• Whilst interest rates might not rise in the short to medium term, the cost of the essentials items are increasing very quickly
• It is little wonder that rents are not rising much or that many Millennials (that’s what they call Gen Y now) are just giving up trying to buy a home
• Now whilst the next year or so looks okay for our housing markets, my longer term view is that a reset is overdue; and it’s not rising interest rates, but this increasing "pinch" that will be one of the main housing reset triggers.

Michael Matusik