Is the economy in a better or worse situation than it appears?

We are now well into reporting season and overall things are looking quite good for a lot of companies. Most reports so far have shown profit growth and any declines have mostly been small ones, such as today’s announcement by Cochlear Limited (ASX: COH) that its profit fell by 1%.

Corporate Australia is not the main and only important factor for Australia’s economy, but it can provide a good gauge. Some reports may be underwhelming against expectations, but most bottom lines are still growing.

Other positive points are that net job growth is still positive and wage growth is still growing too, although it’s at its lowest growth for many years.

Many market commentators point to things like Australian household debts being at all-time highs, Australia’s lack of growing industries and slowing wage growth that could bring things down.

Indeed, the economy is heavily dependent on Australia’s housing market to continue growing as it supports so many other areas such as construction, renovation businesses and real estate agents.

There are increasing signs of mortgage stress from new homeowners and interest-only investors. Earlier-than-expected changes to repayment schedules are forcing investors to think twice about holding onto their assets.

Negative gearing loses cash, but it can worth it to swallow that hit if prices are going up. House prices across Australia are starting to head downwards, particularly in Sydney where the average price has dropped by more than 3% over the past six months.

Increases to the repayment coming earlier means that investors need to start paying up to 50% or 60% more each month to the bank than they were before, which is hurting their budgets and making them think about selling. Re-financing can be very difficult now because borrowers need to go through more rigorous lending tests, introduced by APRA.

If these over-indebted investors need to sell and there isn’t the demand for the sales then prices could keep heading down, forcing more sales.

Foolish takeaway

In the next three to six months it looks as though the Australian economy will power ahead, but beyond that things look dicey for the economy, particularly for those with huge mortgages hanging over their heads. Investors need to be prudent.

To avoid a debt crash, it might be wise to consider investing in one of these top shares.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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