SYDNEY (Reuters) - This is a tale of two cities. There's the beachside Sydney, washed by white foamy waves, dotted by cafes and high class restaurants and multi-million dollar houses and apartments -- it's boomtown Sydney.
Then there's the other Sydney. The one not in the tourist brochures, that stretches west and is home to the bulk of the city's six million residents, many struggling to survive the global credit squeeze, a 12-year high interest rate of 7.25 percent, rising food and fuel costs and falling house prices.
Sydney, like the rest of Australia which has enjoyed 17 straight years of economic growth and a housing boom in recent years, now has a two-speed economy and the divide between winners and losers seems to be widening.
By the end of 2008, an estimated one million Australian households will be suffering mortgage stress, which means they pay 30 percent or more of their household income on mortgage repayments, says a recent Fujitsu Consulting/Wizard Home Loans survey. Hundreds of thousands of homeowners are in severe mortgage stress and are unable to make repayments on time.
"The sad fact is that come Christmas time, we estimate that one million Australians will suffer mortgage stress. That's a huge number of people that are potentially going to face losing their property unless drastic action is taken," said Mark Bouris, chairman of Wizard Home Loans.
And the country's biggest city Sydney has some of the biggest mortgages. The average monthly mortgage repayment in the city has risen more than 40 percent in the past five years, says a study of the city by the University of New South Wales
The study said homeowners in western suburbs such as Canterbury, Bankstown and Auburn, were paying over 40 percent of their income on mortgage repayments. Meanwhile, wealthier eastern and northern suburbs have seen incomes rise to accommodate higher mortgages.
"Sydney got richer in the first five years of the new century, but that new wealth was very unevenly spread about," said the report titled "Our Changing City" by The City Futures Research Centre at the University of NSW.
Home repossessions and personal bankruptcies in Sydney's west are rising and while some homeowners are selling up, sliding house prices are leaving them with large debts to banks.
There were 1,077 court-ordered home repossessions in NSW in the first quarter of 2008, compared with 921 in the same period in 2007. Of the top 10 worst areas for delinquency, late mortgage payments, six were in Sydney. And its Sydney's western suburbs where most homes were lost.
While residents in the city's affluent east, north and inner west may have large, often multi-million dollar mortgages, their properties are holding their value. In contrast, housing prices in some western suburbs have fallen 20 to 50 percent.
Sydney house prices have fallen 2.1 percent in the quarter to June, the largest fall since 2004, and will experience an annual fall of 8.4 percent, says Australian Property Monitors
The median price for a Sydney house in June was officially A$542,000 (US$471,00), but that will not buy you a house anywhere near Bondi in the east, where the starting price for a house is well above A$1 million, nor anywhere north of Sydney Harbour.
Housing affordability is declining in Sydney, especially in outer suburbs, said The City Futures Research Centre report.
"This is consistent with an analysis of the changing income growth across the city, with stagnant household incomes in many middle and outer west suburbs contrasting to strong income growth in the inner, eastern and northern suburbs," said the report.
Not only has 12 interest rate rises since 2002 divided Sydney, but so has the rising cost of living, with inflation forecast by the central bank to reach five percent by year end.
Australia's economic boom has seen credit card debt soar to around A$44 billion, with the average card carrying a 19.5 percent interest charge on a monthly balance of A$3,100.
"Household indebtedness is around historical highs," says the Reserve Bank of Australia (RBA). Welfare groups say financial crisis services are swamped by people, many from western Sydney, struggling with mortgages and sometimes up to 12 credit cards.
"It's not unusual to see a person come with a large mortgage debt but also a string of credit cards as well, which they have often maxed out to maintain the mortgage for as long as they can. They use credit cards to buy food, pay utilities," said The Salvation Army's Tony Devlin.
"There's definitely an economic divide (in Sydney). There's two economies operating, the one our clients operate in and the other that you see on the front page of the Australian Financial Review," said Devlin.
Personal bankruptcies are rising in NSW, faster than in any other Australian state. Every quarter more than 2,000 people in the state file for personal bankruptcy. In the year to June there were 9,938 bankruptcies in NSW, a rise of 7.47 percent on a year earlier, and total insolvency totaled 12,207, up 8.43 percent.
While only five percent of Australians in mortgage stress will default, says Fujitsu, many more will avoid foreclosure by selling their homes and moving into the rental market.
But Sydney is already suffering a rental crisis, with a lack of accommodation and a rising population resulting in rents increasing by 15 percent in the past year. There's anecdotal evidence of landlords doubling rents in the past six months.
"It is obvious rising rents are being driven by high mortgage rates," said Michael McNamara, APM's general manager.
"On one hand landlords are trying to offset increased costs and on the other hand high interest rates deter renters from making the shift into home ownership."
And things are not set to get any better.
The RBA this week warned of an economic slowdown, with non-farm sector growth of only 1.5 percent for the rest of the year leading to a likely rise in unemployment. Even if the central bank cuts its cash rates in coming months, as many now expect, commercial banks may not pass on the cut due to the global credit squeeze.
Editing by Megan Goldin