You may have heard of Charles Ponzi.
His money-making scheme in the 1920’s US is where the term ‘Ponzi scheme’ was born. It’s a classic pyramid scheme. One that sees existing investors paid big profits from the funds new investors pour into the scheme.
The new investors, in turn, get paid as other newbies enter into the scheme, chequebook in hand.
It all works very well…until it doesn’t. Eventually the base of the pyramid — the vast majority of investors — are left with big losses when no new investors show up to the party.
And if the mountainous levels of debt accumulated by Aussie home owners is anything to go by, that scheme may be alive and well right here in the housing market.
As noted by Your Mortgage:
‘Australia’s household debt-to-income level has reached an unfavourable new milestone, hitting 200% for the first time. Total household debt has reached a record $2.47trn, or nearly $100,000 for every man, woman, and child.’
That, by the way, means the average household now owes twice their total annual income.
So how are Australians neck deep in debt?
Australia’s exorbitantly priced property markets, of course.
According to the Australian Bureau of Statistics (ABS) home loans make up 56% of total household debt. ‘Other property loans’ constitute a further 33% of debt.
Putting two and two together, 89% of Aussie household debt — or $2.2 trillion — is tied into home and other property loans.
Now $2.2 trillion of debt tied into homes and other properties is all well and fine…so long as prices keep going up.
If prices significantly fall, on the other hand, the entire pyramid scheme gets turned upside down. And there’s a reason Egyptians built their pyramids pointy side up. They don’t tend to hold up well when they’re inverted.
Now Australia’s house prices aren’t crashing yet. But the pace of their losses is speeding up.
Sydney, which led the meteoric price gains over the past few years, is now leading the way down.
According to CoreLogic, dwelling values fell by 0.9% in Sydney in January. That leaves Sydney’s home prices down 2.5% over the last quarter.
Even Melbourne’s booming population wasn’t enough to keep the city from seeing a 0.2% decline in home values in January.
If everyone owned their homes outright, this wouldn’t be exceptionally frightening.
But Australians owe $1.4 trillion on their homes. If Sydney’s 2.5% quarterly fall is any indication of the action to come, investors may soon find they owe more than their homes are worth. This could lead to a wave of defaults and bankruptcies.
All of which will drag on the economy, the stock market, and the already battered banks. And likely put more downward pressure on home prices.