Banking on more bad debts

The change in consumer buying behaviour is accelerating – and it's happening most markedly among higher income families. Liquor retailers tell me that high income males are cutting back their purchases. Other retailers find incredible price consciousness among all levels of consumers forcing them to cut prices to generate sales.

Foxtel says that subscriber renewals are good but it's becoming harder and harder to attract new subscribers. When you see such events taking place in the market place it's not long before the bankers experience the trend.

Here in Australia our banks have had a strong profit reporting season but suddenly hairline cracks are appearing. ANZ chief Mike Smith reveals that more people are not paying their credit card minimum balances. Westpac chief Gail Kelly alerted shareholders to a rise in consumer arrears.

Inflation for people – the real cost of living – is rising rapidly but in most cases it is not being matched by incomes, although people still have their jobs and there are other jobs to go to. The cutbacks in expenditure are most severe in the higher income families who have bought large houses on big mortgages. And their problems are reducing the value of dwellings as their friends become cautious about falling into the same trap.

There is no sign that these problems are going to recede unless people are working in boom industries. Accordingly, further interest rate rises will now really bite into bank profits because we will start to see rises in bad debts.

The commercial building unions are now pressing very hard to have the Victorian desalination plant pay rates of $200,000 to $300,000 a year with big tax free components and very generous days off become the norm around Australia. So far the builders have found it hard to get the clients to pay the enormous rise in construction prices that are required to pay these rates – a situation that has the potential to delay the commercial investment boom.

In this environment, one of the most important indicators will be the banks' problem loans. If those cracks that have been isolated by ANZ and Westpac start to widen and spread, we will suddenly find ourselves living in a world a little more like the rest of the globe.