Perfect storm of pain ahead
Insolvencies ‘set to rise’
A “PERFECT storm” of interest rate rises, cost-of-living pressure and pay increases below inflation will potentially generate a wave of insolvencies across Australia, warned a leading insolvency and turnaround solutions specialist.
Jirsch Sutherland principal and personal insolvency specialist Michael Chan said history could soon repeat with a personal and corporate insolvency cliff looming.
He warned that “mums and dads” and retail and hospitality businesses were likely to bear the brunt, just like with past economic crises.
“The perfect storm is brewing. When rising interest rates are coupled with inflationary pressures, past trends have shown a corresponding rise in bankruptcies,” he said.
“There are distinct correlations: there was a sharp economic slowdown in the mid-90s (following the 1991 recession) when the cash rate and bankruptcies rose simultaneously. Bankruptcies and the cash rate were almost in lock-step during the 2007-2008 GFC and it’s a similar situation now.
“And while bankruptcy numbers are currently still stable and homeowners still have some savings, cracks are appearing.
“For example, staff cuts and recession warnings are more prevalent, the tax man is lurking and regulators are getting ready. We are already seeing a definite increase in corporate insolvencies and believe personal insolvencies will follow.”
The Reserve Bank on Tuesday lifted interest rates for the ninth time in a row, by 25 basis points to 3.35 per cent – a 10year high.
Sydney-based Mr Chan said that, similar to the GFC, affected homeowners would include those who had bought an investment property.
“We are looking at what has happened in the past and back in the 2008 era we had mums and dads who invested in property and, when the interest rates rose, their rental income was not sufficient to cover the mortgage repayments and they fell behind,” he said.
“The big difference from 2008 for homeowners and investors is that property prices are now significantly higher. We are coming off record low interest rates and, depending when you bought your property, you may be able to build up a savings buffer.
“For those who bought in the last couple of years at the peak, they won’t have that buffer and also when they calculated their repayments they didn’t factor in the rise in the cost of living and that’s where it will cause the most pain.”
Mr Chan said the perfect storm would also hit retail and hospitality businesses, whose income would be reduced because of less discretionary spending. He urged consumers and business owners to conduct a financial health check to determine their position and to seek help immediately if there were issues.
“Financial distress can sometimes take you by surprise,” he said.