There are some troubling figures starting to emerge in relation to a jump in bankruptcy, insolvency, and mortgage stress. These areas have all spiked recently as the covid era business protections are removed and markets are left to function more normally. Keep in mind that these figures are coming off a low base, but it signals a new phase for the economy. Here in Australia according to the latest insolvency statistics from ASIC (Jul 2023), insolvency rates are climbing sharply now too. During covid, insolvencies were in the 4,000-5,000 range annually. In the last 12 months, this figure has increased substantially and is now in the 8,000 to 9,000 range with 866 businesses being wound up in May alone. This is emerging across the world with places such as the UK particularly severe. The key concern is the flow-on effect through the economy. Increased bankruptcy means less jobs and less money being spent by both consumers and businesses in the economy. It snowballs from there.
At the same time, here in Australia, we are starting to see a spike in borrowers in mortgage stress. According to Roy Morgan research, over 1.4 million Australian borrowers are facing mortgage stress, up 78% from a year ago. The figure means almost 30% of all mortgage holders are in mortgage stress, which is the highest rate since the GFC. The most troubling aspect of these figures is that they’re at these alarming levels despite the economy not being in a recession and at a time of record low unemployment. If we see the unemployment rate materially rise in the months ahead, which I believe we will, these figures spike even higher. With so many people already struggling now while most people have a job, imagine the economic carnage when the unemployment rate rises. Mortgage stress means consumers have less money to spend on everything else. It slows economic growth, and it becomes a vicious cycle leading to more insolvency, less jobs, less spending and so on.
The added issue with mortgage stress for the property market becomes forced selling. It’s been a long time since we have had a situation like that with property, but I think it’s now a possibility. Distressed property owners selling drives prices down fast. Even during the GFC here in Australia, we didn’t really experience property issues in the same way the USA did. You really need to go back to the early 1990s since we’ve seen a scenario like that. It’s simple supply and demand. When you get distressed sellers, a glut of properties form and supply becomes greater than demand. The prices start to fall to meet demand. As people become more desperate prices fall even faster. Compounding this issue is the fact that buyers realise if they wait, prices will go even lower. So then demand starts to dry up and the situation becomes even worse. I’m not saying that will definitely happen, just that it could occur in this cycle. It’s on my radar and it hasn’t been before.
When we start comparing statistics to the GFC era, you need to keep in mind that in many cases we are talking about the maximum pain points that peaked at the end of the GFC in 2009. What came with that was a whole range of government stimulus and borrowing that was designed to make the upfront pain easier in order to spread out the pain over time. But we never stopped making things easier. Now, we’ve created inflation and as the economy gets worse, there isn’t a lot the government can do to help. Businesses, consumers, and families are going to have to wear the pain. Governments will lower interest rates, but we have the spectre of inflation hanging over us now so governments will be hamstrung with the policy moves they can make. So, while the GFC was bad, it wasn’t as bad as it was meant to be. Governments kicked the can down the road. We are getting closer to the end of that road.
The convergence of these variables doesn’t happen very often, but we have all the requirements for these once-in-a-generation scenarios forming in the background in this economy. It’s one of those things that when you say it, people think you’re crazy, but then when it happens, those same people will say it was obvious. Now interest rates may well still be low historically, especially compared to the 1990’s but it’s all relative. Someone borrowing as much as they can at 3% is going to be in trouble when their rates double to 6% or worse. As slow as the downturn has been to arrive once it is here it will be a problem for the whole economy and all asset classes. We’ve already had a false start in 2022 and since then everyone wants to pretend the worst is behind us. Diversify, be patient and be prepared. You don’t have time to position for it later. The time to position for the bad is when it’s still good. It’s too late to batten down the hatches once the storm hits.
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