Australia – “They claim they never did anything wrong, but of course they did. They paid too much for a house, and they had no cash cushion if one or more of them lost their job.”

From ‘Secretly Broke in Australia’, at Mike Shedlock’s Global Economic Analyst blog, 8 Aug 2011. Transcripts from a ’60 Minutes’ TV feature (‘The Big Squeeze’) on the personal consequences of moves in the Australian housing market. [hat-tip to ‘bubbly’]

ALLISON LANGDON: To the world, Tracy and David Dodd are the very model of Australia’s relaxed and comfortable middle-class. They’re living the dream – three kids, a mortgage and a suburban family home on an acre block. But Tracey and David have been keeping a secret from their family and friends – they’re drowning in debt. No-one to look at you would think that you are struggling.

TRACY: It might look like we have got everything but you don’t see the mortgage, you don’t see the loans. You don’t see everything and nobody wants to talk about it you know, because it is embarrassing.

ALLISON LANGDON: Has it taken a toll on you both?

TRACY: (weeps)

DAVID: Oh it has – it has taken its toll but you’ve just got to do it.

ALLISON LANGDON: Like most young couples, the Dodds invested their heart and soul and every spare cent they had into the ideal of home ownership – the biggest mortgage their double income would allow. But last June, Tracy lost her job in the construction industry and David was made redundant. Just to keep money coming in, he’s taken a lower-paying job. Ever since, the Dodds, like tens of thousands of middle class families have been going secretly broke in the suburbs.

TRACY: We went from having a really great income including a company car, fuel card, phone – things like that – to basically losing all of that.

ALLISON LANGDON: So do you have more money going out each week than what you’ve got coming in?

TRACY: Absolutely.

ALLISON LANGDON: How much difference are we talking about?

TRACY: Probably – it’s getting very embarrassing – probably about 400 bucks…$400.

ALLISON LANGDON: This is the outskirts of the Gold Coast. When you look around and see the big, shiny new houses, the nice lawns and two cars in the driveway, you can’t help but think, ‘life must be pretty good here.’ But this version of the Great Australian Dream is just a facade – nowhere is mortgage stress being felt more keenly than right here. And the figures are staggering – one in 50 families are at risk of losing everything. The number of Australians behind on their mortgage repayments by more than a month is at an all-time high. Areas of mortgage stress can be pinpointed right around the country. Mostly in areas, that just five years ago, were booming. Families who borrowed to the limit in the real estate gold rush are the ones who are now struggling to pay their bills.


MISH’s comment: “The story continues with Phil and Sandra Box who claim they never did anything wrong. Of course they did. So did Tracy and David Dodd.
Not only did they pay too much for a house, they had no cash cushion if one or more of them lost their job.”


Another extract from the 60 minute piece:
“A generation ago, buying a house was a rite of passage, bricks and mortar were as good as money in the bank. Not any more. Nowadays, renting might just put you ahead of the game.”


Note that for the “figures” to be “staggering”,  just “one in 50 families” need to be at risk of “losing everything.” What will the Vancouver area numbers be at 10%, 20%, 25% RE price drops (and with the resultant effects on our  RE-dependent local economy)? – vreaa

47 responses to “Australia – “They claim they never did anything wrong, but of course they did. They paid too much for a house, and they had no cash cushion if one or more of them lost their job.”

  1. The Gold Coast has been hit hard recently. And mortgage rates are high.

    OK I can’t stand it… Why don’t they sell their ONE ACRE lot and move?

    • It was observed in the US from 2007 onwards that people held onto their houses for as long as they could service their debts, no matter how underwater they were. It wasn’t until unemployment stated running rampant that homeowners realised they were in deep trouble.

      As long as unemployment doesn’t change appreciably in Vancouver and the rest of Canada, I don’t think you’re going to see declines of 25% like Ben Rabidoux predicts.

      • Our own thesis is that there is such a large gap between RE prices and fundamental values that, once momentum begins to the downside, and once people stop buying based on the idea that prices always go up, prices will plummet. We don’t think that this effect will be dependent on either rising interest rates or unemployment. Our own targets are 50% off, or even more, by the eventual bottom.
        Of course, when RE does seize up here, there will be a resultant contraction in the economy (direct and indirect effects as RE shrinks from current 22%+ of GDP to more normal 15%), and this will add additional downside pressure. Any raise in interest rates will similarly add to downside pressure. But the most important engine driving prices down will be the evaporation of speculative fervor.

      • VREAA, you’re predicting a loss of 7% of Canada’s GDP? From a macro point of view, this would mean economic chaos wouldn’t it? How much would Eurozone and American economies have to decline before Canada starts to sink?

      • matt -> Sorry, should have specified: those are BC numbers, not whole of Canada. (and we expect the 50% bust to apply to BC, esp Vancouver, not whole of Canada).
        With the housing bubble, RE/Construction/etc now makes up about 22% of BC GDP (and that doesn’t include all the knock-on economic ‘benefits’ of the mania); more normal levels are 15%-16%. So, yes, we’d expect, in the downturn, for this sector to shrink back to 15% here in BC. Wouldn’t you expect the same?

      • Yes, it would seem reasonable but aren’t housing starts increasing right now in the face of sales and price declines?

      • Does this mean cap rates will double? Yummy.

      • Jeff Murdock

        I see BC GDP of 153B, with a contribution from construction of 10B and from Finance/Insurance/Real Estate/Leasing/Magament of 37B. If we consider this to be RE’s contribution, then it’s 30%.
        http://www.bcstats.gov.bc.ca/data/bus_stat/bcea/BCEAchnd.asp
        Even removing banking & insurance still gives 27%.

        What astonishes me is “Motion Picture and Sound Recording”, with a contribution of 0.38B. So the grand “Hollywood North” contributes only 0.2% of provincial GDP.

  2. “OK I can’t stand it… Why don’t they sell their ONE ACRE lot and move?”

    If they are underwater they might not be able to get out without writing a check for money they don’t have.

  3. pricedoutfornow

    This is going to happen here. Sadly, I have some friends who live in a nice, upper-class neighborhood full of big houses. They are absolutely stretched to the limit. There’s no money for anything anymore. And unfortunately they aren’t the only ones I know who are basically counting down the days until there’s not a penny left on the line of credit to draw from (the credit cards are long maxed out). Next stop is cashing out their RRSPs, they tell me. Then…that’s about it. End game. Why the mess? A bad investment in a condo that’s done nothing but depreciate in value since they bought it presale (flip gone wrong). Now it’s a losing rental property that is draining their every last resource. And these were people I looked up to financially, they were very conservative with their money for the past 20 years-even had their mortgage on their principal residence paid off by age 45! I can’t believe the risk they took. And if these people succumbed to the greed, I can just imagine how many more there are out there…

  4. this is a story about job loss and downsizing not poor real estate decisions. I’m sure they would have also been adversely effecting had they been renters rather than owners.

    • Take a look at the picture. Those aren’t Ikea-grade chairs.

      The difference between owning and renting is that they can, at a moment’s notice, move from a ONE ACRE lot into a much smaller dwelling at a substantially reduced monthly outlay with virtually no risk of insolvency.

      But all is not lost. Tracy and David have their house for sale and, so they hope, will come away without going bankrupt. This is simply a case of them holding onto an impossible dream. So yeah I agree Rusty — the problem isn’t really home ownership or home rentership, it’s that these people are living beyond their means.

      You know what really broke my heart about this piece, though? Seeing those horrid renter families squander their money spoiling the kids, when those hard-up homeowners have their 8-year-old kids worried about their futures. They had to rub it in by going to an amusement park and feeding horses carrots on their expansive rented lots. Absolutely disgusting show of wealth, that is.

    • They could move more easily into cheaper accommodations if they rented and wouldn’t have to deal with closing costs and potentially writing a cheque to the bank on closing. Also the thread running through the whole story seems to be that renting is cheaper than buying, that buying a home in Australia is quite expensive and that they could possibly rent something equivalent or nicer for less than what they are spending on their mortgage.

      Rusty, what say you of the thousands, or is it millions, I don’t even know what the number is really, of people who rent in Europe as referenced in the video? Renting is considered socially acceptable and prudent in Europe, and did they say Britain, too? So over there it’s the norm and home ownership is some sort of a luxury. So how do you explain how people in Europe build wealth? I’m honestly asking.

  5. “What will the Vancouver area numbers be at 10%, 20%, 25% RE price drops (and with the resultant effects on our RE-dependent local economy)”? – vreaa

    The answer, none. Value loss has nothing to do with inability to pay.

  6. “The difference between owning and renting is that they can, at a moment’s notice, move from a ONE ACRE lot into a much smaller dwelling at a substantially reduced monthly outlay with virtually no risk of insolvency”.

    Jesse,
    sorry, the reply option doesn’t work for me.
    Couple can still move to much smaller dwelling and rent their home until their situation improves. I guess they are not creative thinkers.

    • When rent is out of whack with the housing market, rent will not cover the mortgage/property taxes.

      What happened to this couple is exactly what happened in the USA. I don’t know if in Australia the couple can walk away from the house. If they can’t, it’s not so simple. If housing prices fell below what they paid for the house, they are out of luck.

      In the USA many people are stuck in their houses because the value of the house fell below what they paid for the house. They literally can’t sell because they don’t have the money to pay off the mortgage. They also can’t refinance.

      When I think about renting versus buying in Canada, that is what concerns me. I’ve seen what happens to people who get stuck in a house they can’t sell without a loss.

    • “rent their home until their situation improves”

      Methinks part of the problem is that the market rent won’t cover the mortgage. I like your thinking though.

    • HOLY FUCKING SHIT

      RUSTY APOLOGIZED FOR SOMETHING

      SAVOUR THE MOMENT

  7. COV604

    if income and mortgage payments do not change then how does the devaluation of a property effect an ability to pay?
    In fact, in a deflationary environment interest rates decline – ergo, the ability to afford improves if the mortgage is variable.

    • An inability to pay isn’t typically a function of stable income and mortgage payments. So either you just wrote two conflicting statements or I’m out to lunch.

    • In a deflationary environment jobs are also prone to disappearing. Can’t have the cake and eat it too.

  8. again, value loss has nothing to do with ability to pay. How can I be more clear?

  9. its clear you need to review the fundamentals of supply and demand and the affects they have on pricing mechanisms. The internet’s your oyster…go wild.

  10. cov604
    I think you need to review your use of logic. Have it at…please!

  11. “When rent is out of whack with the housing market, rent will not cover the mortgage/property taxes”.

    How do you know rents won’t cover the mortgage? You’re making some sweeping assumptions on the Australian market. Or maybe you do know…where is their home, what can you rent a full house for in their neighbourhood, what is their mortgage payment? I guess you must have all this information to be able to make the above statement

    • Price to rent ratios demonstrate when these situations fall out of whack. Last time I looked Australia had very bad price to rent ratios. (as does Vancouver.)

      This is an educated guess on my part, as I observed this siuation quite frequently in the states. I also know of a situation in Canada where a landlord couldn’t cover rent plus condo fees and he lost his place.

      How much does a landlord in Vancouver have to possess in equity to cover his mortgage and property taxes? Clearly this Australian couple didn’t have a lot of equity in their house. (Or they had lost their equity in a downturn of property prices.)

      • Don't Prop Up the Ponzi

        As an Australian, I know that the rent would probably not cover the mortgage repayment. Investors can use the tax laws here to negatively gear, so that the tenant and the government contribute to the mortgage, but usually the investor is still out of pocket. The higher the salary, the more the tax benefit works in the investor’s favour. With a small wage, it’s not worthwhile. So in this case, the couple would have to find money for rent, and for the mortgage. The only reason for holding onto investment properties, especially those that were bought in the last few years, is for capital gain, and like in Canada, capital gains here have been massive. Now that the bubble has started to let out a little air, people are becoming somewhat uncertain about property as a good investment. And, by the way, the bubble has affected almost every part of Australia. In this year’s Demographia survey, Australia’s housing ranked as either seriously unaffordable or severely unaffordable.

  12. Saw a story on Seattle news of the rental market there very hot. Rent rates are increasing while vacancy rates are lowering. They mentioned a number of areas where people are actually bidding, driving up rent prices. But oh no, this can’t happen to “The best place on earth”!

  13. “Last time I looked Australia had very bad price to rent ratios. (as does Vancouver.)”

    Australia is a big country. Are you saying the rent ratios are out of whack in every single location? Yet another broad, sweeping assumption. Or perhaps you can provide some links to back up your claim

    • Actually Australia has (had) what is close to a nation-wide housing bubble, all its major cities with high price-income ratios. Not so in Canada or the US, even at the US’s peak valuations in 2005/6.

      Maybe the price-rent ratio on that particular property isn’t that bad but I’ll take the odds it’s not.

    • “Australia is a big country. Are you saying the rent ratios are out of whack in every single location? Yet another broad, sweeping assumption. Or perhaps you can provide some links to back up your claim”

      Why no, I’m not saying that. I’m also not claiming to know why, exactly, this couple didn’t do the obvious and rent out their place to cover their mortgage/property taxes.

      However, I am suggesting that the couple may not have done the obvious — rent out the house — because the obvious may not have solved the problem.

      I would also suggest that price to rent ratios are a factor that may reveal informative information about housing markets. And while I’m most definitely not an expert on Australia, I would be pleased to provide you with a link that may be of interest:

      “In April 2010, The Economist house price indicators estimated Australian house prices were the most overpriced in the world, at 56.1% overpriced (against long-run average of price to rents ratio).[32]” ( “House prices: You can’t keep ’em down” _The Economist_ April 2010) [http://en.wikipedia.org/wiki/Australian_property_bubble]

    • Everyone generalizes from a single data point. At least I do.

  14. yank,
    I agree that we need more information before we suggest a remedy. One thing is sure, this couple needs to work.

  15. Price/rent is not the issue for this couple its rent/mortgage payment ratio but more importantly its total debt servicing / income that is the issue for people long run.

  16. Sydney, Melbourne & Perth have has sardonic RE price increases mainly due to Chinese money, these cities can somewhat hold up in a dip.

    The RE challenge areas are where mainly Australian population lives: Gold Coast, Brisbane, Cairn, Darwin etc

  17. After re-watching the piece it is rather sad, actually. This family is not interested in cash returns or whatever. They want to stay in their HOME, and did everything they could to do so. Coming up with various schemes to keep the property by renting or whatever doesn’t make any sense to them because they cannot live there themselves. Having it rented would probably add emotional pain; it’s probably best they cut it loose and move on, and no doubt they discussed the possibility even if it were financially feasible.

    I cannot say I have much sympathy for families like this, they reaped what they sowed.

    And more to come, unfortunately. Notice these families were facing cash flow problems but not solvency problems.

  18. – they simply paid too much for their house by buying at the wrong time – the solution is sell, take the loss and move on instead of hoping that their situation will miraculously improve (like renting to cover a mortgage that consumes 70% of thier combined after-tax income! LOL! ). Certainly RE prices in Australia are starting to correct and things will get much worse once prices revert back to their fundamental mean. It’s called the deflating/popping of a bubble. This story will look like a cake-walk compared to the carnage we’ll see in Vancouver! Nobody is gong to care though because the rest of Canada is tired of Vancouver’s boisterous arrogance.

  19. I thought of another reason that this couple may have chosen to sell. I’ve seen in the States how one of the on-going economic problems is that labor mobility is restricted. Too many marginally employed people are trapped in houses that they can’t or don’t want to sell because they’ll end up with a loss. (Sale price is less then what they paid for the house.)

    In this couple – they need to find better employment. They might need to move to find jobs. Selling the house frees them up geographically to find jobs. This might be their best bet to stabilize themselves financially.

    (And becoming a landlord requires a certain ammount of cash — costs for repairs, costs where the house is vacant for a month or so — marginal families cannot cover these sorts of costs.)

    • CanuckDownUnder

      It’s no coincidence she lost her construction industry job when the bubble on the Gold Coast popped.

      Unless you’re catering to retirees or tourists there’s not much work in that area.

  20. Pingback: Spot The Speculators #51 – “If these people succumbed to the greed, I can just imagine how many more there are out there.” | Vancouver Real Estate Anecdote Archive

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