tag:theconversation.com,2011:/au/topics/mortgage-stress-37601/articlesMortgage stress – The Conversation2024-01-03T20:27:31Ztag:theconversation.com,2011:article/2181182024-01-03T20:27:31Z2024-01-03T20:27:31ZThe cost-of-living crisis is hitting hard. Here are 3 ways to soften the blow<figure><img src="https://images.theconversation.com/files/562608/original/file-20231130-17-o8fryb.jpg?ixlib=rb-1.1.0&rect=0%2C24%2C8256%2C5462&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>As our wallets feel the strain from the cost-of-living crisis, many of us are looking for ways to soften the blow.</p>
<p>While everyone’s circumstances are different, and ideally you should seek help from an accredited financial adviser, there are some tried and true ways to work out where all your money is going and why.</p>
<p>Here are three practical tips to reduce the impact of the cost-of-living increases, and stretch every hard-earned dollar.</p>
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<h2>1. Hunt for a better loan rate</h2>
<p>For many households, the biggest hit comes from the mortgage, so start there.</p>
<p>Even a modest 0.5% reduction can translate into substantial savings. Call your bank today and just ask for rate reduction. If the answer is no, consider shopping around for a different lender.</p>
<p>Your loyalty to your current lender might be costing you more than you realise. Banks often reserve their most attractive rates for new customers, leaving long-time customers paying higher-than-necessary interest.</p>
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<a href="https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks at her phone while sitting in a chair." src="https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">It’s OK to shop around for a different lender.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>Even if your bank does agree to a rate reduction, explore the market anyway. There is a range of free rate-comparison websites, or you can directly check individual bank websites.</p>
<p>If you find a lender offering a better rate, you might consider calling the competing bank to ask about switching your mortgage to them. </p>
<p>Or, you might seek assistance from a mortgage broker, who can guide you through the process of securing a better deal (just remember they often take <a href="https://www.canstar.com.au/home-loans/mortgage-brokers-fees/">commissions</a> from lenders).</p>
<p>Tread carefully and factor in any exit fees or charges from your current lender. Refinancing isn’t without risk, so a thorough cost-benefit analysis is important before making the switch.</p>
<p>Also consider the value of features such as <a href="https://moneysmart.gov.au/glossary/offset-account">offset accounts</a>. An offset account, linked to your home loan, allows you to deposit money such as your salary and savings. This money is then “<a href="https://www.rba.gov.au/publications/smp/2015/aug/box-e-offset-account-balances-and-housing-credit.html">offset</a>” against your home loan balance. </p>
<p>That means you only pay interest on the outstanding amount (the loan minus whatever salary and savings you put in the offset). This can accelerate loan repayment and reduce interest costs.</p>
<p>Keep in mind that offset accounts are typically only available with variable interest rates. Offset accounts work best if you have considerable savings to put into the offset account that outweigh the additional fees and charges attached to offset accounts. </p>
<h2>2. Trim your expenses and uncover hidden savings</h2>
<p>It’s time to become a budget detective, identifying and cutting down on non-essential costs that might be quietly draining your wallet.</p>
<p>Take a close look at those recurring memberships and subscriptions. How often do you actually use that gym membership or streaming service?</p>
<p>Many banking apps have handy spending tracking features to help you set realistic budget goals for each spending category. </p>
<p>According to the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/latest-release">Australian Bureau of Statistics</a>, insurance and financial services are among the top risers in living cost indexes (which measure the price change of goods and services and its effect on living expenses). So search comparison websites for better insurance premiums. </p>
<p>Australia’s insurance market is competitive, and you can often get discounts by bundling your insurances together (for example, having your home and contents insurance with the same company that also provides your car insurance). However, don’t shy away from exploring different insurers for potentially better value.</p>
<p>Don’t overlook energy costs, either. Use comparison websites like <a href="https://www.energymadeeasy.gov.au/">Energy Made Easy</a> (or, if you’re in Victoria, the <a href="https://compare.energy.vic.gov.au/">Victorian Energy Compare</a> site) to find more cost-effective energy plans. Stay updated on rebates and concessions via the federal government’s <a href="https://energy.gov.au">Energy.gov.au</a> site, to ensure you’re maximising your entitlements.</p>
<p>Use less energy, if you can. Small adjustments can make a significant dent in your bills. And for fuel costs, find websites and applications that allow you to lock in the lowest prices in your area.</p>
<p>If you’re renting, ask yourself whether moving to a cheaper suburb or a cheaper home is an option.</p>
<p>Many people use cashback sites like Cashrewards and ShopBack to accrue cashback incentives.</p>
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<a href="https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman does exercise in front of the TV." src="https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=325&fit=crop&dpr=1 600w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=325&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=325&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=409&fit=crop&dpr=1 754w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=409&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=409&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Do you get good value from your gym membership or could you save by exercising at home?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/fitness-online-stay-home-workout-class-1680844543">Shutterstock</a></span>
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<h2>3. Maximise returns and tackle high-interest debts</h2>
<p>While rising interest rates might make your mortgage climb, it also means high interest on your savings.</p>
<p>Consider exploring high-yield savings accounts; with current interest rates, you could potentially earn around 5.5% with a bank savings account. Many people set up recurring transfers to help them stick to savings goals, increase deposits and maximise interest earnings.</p>
<p>For those wrestling with high-interest debts such as credit cards or personal loans, prioritise settling outstanding balances to minimise interest payments.
It can be hard to escape the long-term repercussions (such as a <a href="https://theconversation.com/payday-lending-trap-requires-a-credit-supply-rethink-39311">poor credit score</a>) of defaulting on <a href="https://www.sydney.edu.au/news-opinion/news/2022/09/21/researchers-uncover--pecking-order-of-defaults--as-belts-tighten.html">high-interest loans</a>.</p>
<p>And approach buy-now, pay-later services with extreme caution. They may seem tempting but the <a href="https://onlinelibrary.wiley.com/doi/10.1111/acfi.13100">debts can quickly add up</a>.</p>
<p>And if you need more help, contact the government’s free National Debt Helpline on 1800 007 007.</p><img src="https://counter.theconversation.com/content/218118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ama Samarasinghe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Small adjustments can make a significant difference.Ama Samarasinghe, Lecturer, Financial Planning and Tax, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2185202023-12-03T19:17:00Z2023-12-03T19:17:00ZWe all know about JobKeeper, which helped Australians keep their jobs in a global crisis. So how about HomeKeeper?<figure><img src="https://images.theconversation.com/files/562302/original/file-20231129-17-znejzh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Bipartisan support for temporary extra government spending to preserve businesses and jobs through JobKeeper was one of the few positive outcomes from the COVID-19 pandemic.</p>
<p>Recognition that the long-term damage caused by short-term economic crises far exceeds the cost of temporary government spending to avoid it underpinned that consensus.</p>
<p>It’s worth considering now whether the same logic could be applied to create a “HomeKeeper” program, especially given Reserve Bank Governor <a href="https://www.theguardian.com/australia-news/2023/nov/22/rba-governor-michele-bullock-inflation-interest-rates-speech">Michele Bullock’s recent message</a> that interest rates could stay higher for longer than expected. </p>
<p>JobKeeper kept businesses open and preserved jobs during the short pandemic economic chasm. </p>
<p>Equally, HomeKeeper could help financially stressed mortgagors avoid losing their homes during the current interest rate crunch, and stop them joining already too-long rental queues – or worse, becoming homeless.</p>
<p>Government could apply vital lessons from JobKeeper’s design flaws too, making HomeKeeper a winner not just for vulnerable mortgagors but for the government’s balance sheet too. </p>
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<img alt="" src="https://images.theconversation.com/files/562838/original/file-20231130-21-agbx3d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/562838/original/file-20231130-21-agbx3d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/562838/original/file-20231130-21-agbx3d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/562838/original/file-20231130-21-agbx3d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/562838/original/file-20231130-21-agbx3d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/562838/original/file-20231130-21-agbx3d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/562838/original/file-20231130-21-agbx3d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A recent survey found that over 30% over mortgage holders were experiencing stress with their repayments.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<h2>How a ‘HomeKeeper’ scheme could work</h2>
<p>Rather than loans or handouts, the government could take a small equity stake in the property, equal to the value of the mortgage aid as a proportion of the property’s market value at that time. </p>
<p>The idea is to give those experiencing mortgage stress a little breathing space to recapitalise and get them through until interest rates ease without having to lose their homes. Up to $25,000 in assistance per family would be a reasonable ceiling.</p>
<p>It would work like this. Say, for example, someone has a $500,000 mortgage and their monthly repayment is $5,000. They could apply for HomeKeeper assistance for five months (reaching the $25,000 cap). In return, the government would get a 5% equity stake in their house. This could also be taken out as partial assistance, depending on the home owner’s needs.</p>
<p>Then, when the owner is able to pay back the government’s stake, or when the house is sold – whichever is sooner – the government is paid back the market value of the equity stake at that time.</p>
<p>These equity stakes could be held in a government “housing trust” until repaid on market terms. This would reflect growth in the property’s capital value and make it a sound investment for taxpayers. </p>
<p>By keeping the maximum size of the stake low, the help would matter most to families on low incomes in modest homes. Relative to the size of their mortgage, it would be significant assistance, and might mean the difference between keeping the family home or having to sell.</p>
<p>Mortgage payments could be dispatched directly from the government to the relevant bank with the mortgagor’s permission, to ensure the funds are applied on time and for the agreed purpose.</p>
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Read more:
<a href="https://theconversation.com/what-happens-if-i-cant-pay-my-mortgage-and-what-are-my-options-188891">What happens if I can't pay my mortgage and what are my options?</a>
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<h2>Why is a HomeKeeper program necessary?</h2>
<p>Australia has a crude system for identifying mortgage stress. </p>
<p>In research after the Global Financial Crisis (GFC), Western Sydney University’s <a href="https://www.westernsydney.edu.au/__data/assets/pdf_file/0019/140536/mortgage_distress_report-webversion_hires.pdf">Urban Research Centre found a range of partial</a>, sometimes indirect measures using “inconsistent categories”. </p>
<p>There is “often a failure to disaggregate between wealthy and poorer households”, it said. In other words, government tends to cite the overall picture instead of the specific situation of different types of mortgagors.</p>
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<img alt="" src="https://images.theconversation.com/files/562307/original/file-20231129-25-boohnv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/562307/original/file-20231129-25-boohnv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/562307/original/file-20231129-25-boohnv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/562307/original/file-20231129-25-boohnv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/562307/original/file-20231129-25-boohnv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/562307/original/file-20231129-25-boohnv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/562307/original/file-20231129-25-boohnv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A HomeKeeper scheme could mean the difference for some people between keeping their home or having to sell.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>There is also often the casual assumption that because Australia has full employment, people won’t have trouble meeting their mortgage payments.</p>
<p>“Most households, because employment is so strong and unemployment is so low, they seem to be coping,” ANU economist <a href="https://www.afr.com/policy/economy/sydney-and-melbourne-lead-the-nation-in-mortgage-stress-rba-20231002-p5e923">Ben Phillips told the Australian Financial Review</a> last month.</p>
<p>Phillips conceded, though, that Australia doesn’t have meaningful, up-to-date financial stress indicators. “Various measures such as arrears, insolvency, savings and so on are partial measures or measures that are perhaps too late in the game,” he said. </p>
<p>So the picture is opaque, and lags. The early 1990s recession showed how <a href="https://www.abc.net.au/news/2020-07-08/1990s-recession-shows-there-is-no-quick-road-to-recovery/12431398">immense damage can already happen</a> by the time governments realise its dimensions.</p>
<p>This eventually had devastating consequences for the Labor government that oversaw it.</p>
<p>The then prime minister, Paul Keating, won the 1993 election immediately after the recession, up against the crusading neoliberal opposition leader, John Hewson, who had proposed a big new goods and services tax.</p>
<p>But Labor lost the following election in a landslide as voters, in Queensland premier Wayne Goss’s words, sat “on their verandahs with baseball bats” waiting to vote the Keating government out.</p>
<p>Banks classify loans as “delinquent” when mortgage payments are in arrears. NAB chief executive <a href="https://www.smh.com.au/business/banking-and-finance/nab-anz-see-few-signs-of-mortgage-stress-despite-rate-rises-20230712-p5dnm8.html">Ross McEwan told federal parliament</a>’s House Standing Committee on Economics in July that NAB was seeing “some stress in the system” and an “uptick in 30, 60 and 90-day delinquencies”, but said they remained below the ten-year average. </p>
<p>However, not all mortgagors are equal. </p>
<p>AMP senior economist <a href="https://www.amp.com.au/insights-hub/blog/investing/econosights-mortgage-stress-in-australia#">Diana Mousina said in March</a> that “the downside risks to the household sector are greater than the RBA, and most commentators, are estimating”. </p>
<p>Mousina drew attention to Australia’s record household debt as a proportion of household disposable income, upping the scope for financial stress considerably, and also to the particular vulnerability of one kind of borrower.</p>
<blockquote>
<p>In our view, the risk of mortgage stress lies with recent borrowers who have taken out loans between 2020 and mid-2022, which is around 62% of outstanding housing loans.</p>
<p>These households have not had time to build prepayment buffers […] have had a very fast repricing of mortgage rates, are more likely to have taken out larger loans and were probably not stress-tested for the current increase in interest rates.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/homeowners-often-feel-better-about-life-than-renters-but-not-always-whether-you-are-mortgaged-matters-215147">Homeowners often feel better about life than renters, but not always – whether you are mortgaged matters</a>
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<h2>Helping those who don’t have access to the ‘Bank of Mum and Dad’</h2>
<p>Anecdotal evidence and logic suggest there’s another vulnerable group in addition to the one identified by Mousina: working-class mortgagors.</p>
<p>The “Bank of Mum and Dad” in middle- and upper-income families <a href="https://www.afr.com/companies/financial-services/the-bank-of-mum-and-dad-is-good-for-70-000-new-analysis-concludes-20231129-p5enpp">has for some time helped offspring buy their first home</a>.</p>
<p>A recent further development is the Bank of Mum and Dad providing assistance to help their offspring avoid mortgage delinquency in another intergenerational transfer of wealth among the well-off. </p>
<p>But there’s often no Bank of Mum and Dad for working-class mortgagors, who lack families with accumulated wealth to turn to for help.</p>
<p>HomeKeeper could be the government equivalent to the Bank of Mum and Dad for working-class families trying to hold onto their homes until interest rates ease.</p>
<h2>What are the likely objections?</h2>
<p>Three main objections are likely.</p>
<p>The first is that there’s no evidence there’s a problem whose solution requires something like HomeKeeper. However, current indicators are partial, inconsistent and lag, so over-reliance on them is risky – and there are signs there really is a problem.</p>
<p>The latest <a href="https://www.roymorgan.com/findings/mortgage-stress-risk-october-2023-2">Roy Morgan survey of stress</a> among owner-occupied mortagees showed near-record numbers of people “at stress”, numbering 1,514,000, or over 30% of mortgage holders. Nearly a million of them (967,000) are considered “extremely at risk”.</p>
<p>RedBridge pollster Kos Samaras has been regularly drawing attention to the extent of mortgage stress in social media posts all year.</p>
<p>By mid-2023, Samaras says, “over 1.1 million borrowers in just NSW and Victoria were experiencing negative cash flow” – that is, “income not enough to meet repayments and other expenses”.</p>
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<p>The second objection is that there have been assistance schemes in the past and they haven’t worked very well.</p>
<p>It’s true there have been some small fragmentary schemes, but never one on a JobKeeper-type scale, or with a JobKeeper-level public profile, or with the sound finance characteristics of using equity stakes rather than loans or handouts to fund it. </p>
<p>HomeKeeper would be different in kind, scale, profile and fiscal responsibility from any previous mortgagor-assistance program.</p>
<p>The third potential objection is that it would undermine the impact higher interest rates are designed to have – namely, to restrain household spending – and that interest rates would have to remain higher for longer to make up for that.</p>
<p>This misses an important point.</p>
<p>Radiation treatment for cancer used to involve obscenely large amounts of radiation over diffuse areas to achieve the desired goal, doing massive collateral damage in the process. </p>
<p>Over time, medical scientists refined their techniques and learned how to achieve the desired result using much less radiation confined to much more targeted areas. These days it’s a very precise science.</p>
<p>There’s no reason monetary policy shouldn’t undergo a similar evolution, becoming less blunt, more targeted and causing less collateral damage in the way it achieves the necessary goal of low inflation.</p>
<p>Working-class mortgagors are not the ones whose spending need to be restrained in the current inflationary environment. They shouldn’t be collateral damage in the RBA’s crusade to tame inflation.</p>
<p>A program like HomeKeeper could make the difference between them keeping or losing their homes, in a way that’s good for them and their families, and at the same time a sound investment for taxpayers.</p>
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<p><em>Correction: the definitions of mortgagee and mortgagor were inverted in an earlier version of this article.</em></p><img src="https://counter.theconversation.com/content/218520/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Wallace has received funding from the Australian Research Council. </span></em></p>Applying the logic of JobKeeper to create a HomeKeeper program could save a lot of working-class mortgagors from losing their homes.Chris Wallace, Professor, School of Politics Economics & Society, Faculty of Business Government & Law, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2048072023-06-28T02:27:56Z2023-06-28T02:27:56ZOuter suburbs’ housing cost advantage vanishes when you add in transport – it needs to be part of the affordability debate<figure><img src="https://images.theconversation.com/files/533096/original/file-20230621-37081-fg3o9f.jpg?ixlib=rb-1.1.0&rect=38%2C0%2C4263%2C2827&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>In all the debate about Australia’s housing crisis, the impact of transport has been largely overlooked. </p>
<p>When we talk about transport, it’s usually about <a href="https://www.smh.com.au/politics/federal/commute-times-are-a-killer-treasurer-s-plan-for-city-eco-rentals-boom-20230507-p5d6d0.html">time spent commuting</a> and not the out-of-pocket costs. While housing is typically the biggest household cost, spending on transport is the <a href="https://www.abs.gov.au/statistics/economy/finance/monthly-household-spending-indicator/latest-release">second- or third-largest cost</a> – and these costs are inextricably linked. </p>
<p>There is <a href="http://www.metrovancouver.org/services/regional-planning/PlanningPublications/HousingAndTransportCostBurdenReport2015.pdf">research</a> to suggest the cost difference between the inner and outer suburbs largely vanishes when both housing and transport costs are taken into account. </p>
<p>In Australian cities, housing costs typically decrease with distance from the CBD. Thus, people looking for affordable housing tend to look in the outer suburbs. </p>
<p>The desire to own a home, and reap the benefits of increasing housing values, trumps all other considerations. Would-be buyers typically consider the house price and not the commuting costs. That’s because the home price is a single known figure, while transport costs add up over time.</p>
<p>But when housing and transport costs are combined, the “cheaper housing” in the outer suburbs becomes more expensive as their residents typically travel longer distances. These extra transport costs leave households facing mortgage stress in these outer suburbs in an even worse situation. </p>
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Read more:
<a href="https://theconversation.com/affordable-housing-is-not-just-about-the-purchase-price-75859">Affordable housing is not just about the purchase price</a>
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<h2>The high cost of car-dependent suburbs</h2>
<p>How much does it cost to run a car? Using <a href="https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/Deductions-for-motor-vehicle-expenses/Cents-per-kilometre-method/#:%7E:text=78%20cents%20per%20kilometre%20for,%E2%80%9317%20and%202015%E2%80%9316">Australian Tax Office</a> and <a href="https://www.abs.gov.au/statistics/industry/tourism-and-transport/survey-motor-vehicle-use-australia/latest-release">Australian Bureau of Statistics</a> data, the annual cost for households with one vehicle is around $9,500 per year, or nearly $800 a month. </p>
<p>However, many households, particularly in the outer suburbs, have more than one car. Their costs could be twice as much, or more if they drive longer-than-average distances. </p>
<p>When combined with the national average monthly mortgage repayment of <a href="https://www.canstar.com.au/home-loans/average-home-loan-australia/">$3,425 to $3,535</a> as of April (before the last two interest rate rises), this means driving costs could increase the average cost of owning a suburban home by nearly a quarter (for one-car households) to a half (for two-car households).</p>
<p>Concerns about the transport impacts of housing decisions are not new. In 2006, urban policy researcher <a href="https://theconversation.com/profiles/jago-dodson-2359">Jago Dodson</a> and I developed the <a href="https://www.researchgate.net/publication/37183911_Unsettling_suburbia_the_new_landscape_of_oil_and_mortgage_vulnerability_in_Australian_cities">VAMPIRE (Vulnerability Assessment for Mortgage and Petroleum Inflation Risks and Expenditure) Index</a> to examine household vulnerability to higher mortgage interest rates and fuel costs. It showed the outer suburbs of Australia’s capital cities were the most vulnerable because they depended on motor vehicles (not public transport) to get around. </p>
<p>One goal of our research was to help improve public transport in outer suburban areas. Residents would then be less reliant on car ownership and ultimately less vulnerable to interest rate and fuel price increases. </p>
<p>Policymakers showed considerable interest at the time. However, such concerns seem to have dissipated over the years – although urban transport researcher <a href="https://theconversation.com/profiles/abraham-leung-769594">Abraham Leung</a> <a href="https://radiata.app.carto.com/map/759e22e1-61ed-4025-9ca6-e3bd0182042d">updated</a> the VAMPIRE Index for southeast Queensland last year.</p>
<p>Related Australian research includes a <a href="https://www.ahuri.edu.au/sites/default/files/migration/documents/AHURI-Final-Report-335-Commuting-burden-and-housing-affordability-for-low-income-renters.pdf">2020 analysis</a> of the impacts of commuting costs on housing affordability for low-income renters.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/designing-suburbs-to-cut-car-use-closes-gaps-in-health-and-wealth-83961">Designing suburbs to cut car use closes gaps in health and wealth</a>
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</em>
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<hr>
<h2>Why not consider housing and transport costs together?</h2>
<p>The idea of combining housing and transport costs is not widespread. Yet notable efforts have been made, particularly in North America, to provide a more accurate picture of the true costs of buying a house in particular areas. </p>
<p>The most impressive effort has been the work done by the Chicago-based Center for Neighborhood Technology. It created an H+T (housing plus transportation) Index in 2006. This index examines costs for <a href="https://htaindex.cnt.org/">all parts of the US</a> and is regularly updated. It provides a better understanding of the affordability of each area by dividing housing and transport costs by income.</p>
<p>Another national-level example is the US Department of Transportation’s <a href="https://www.transportation.gov/mission/health/housing-and-transportation-affordability">Housing and Transportation Affordability Indicator</a>. It measures what the average US household spends on housing and transport combined as a percentage of income. </p>
<p>One of the most advanced efforts at a local and regional government level is the work of the metro Vancouver region in Canada. </p>
<p><a href="http://www.metrovancouver.org/services/regional-planning/PlanningPublications/HousingAndTransportCostBurdenReport2015.pdf">This study</a> found that when housing and transport costs are both taken into account, there is little cost difference between the inner and outer suburbs. Thus, prospective home owners would be better off looking for housing closer to the CBD. Vancouver includes housing and transport costs in its <a href="http://www.metrovancouver.org/metro2040/complete-communities/housing-affordability/housing-transportation/Pages/default.aspx">Metro 2040 Plan</a>.</p>
<p>Another regional government example comes from Portland, Oregon. The city has created an <a href="https://equityatlas.org/atlas-maps/housing-and-transportation-cost-burden">equity atlas</a> that shows the combined cost burden of housing and transport. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/living-liveable-this-is-what-residents-have-to-say-about-life-on-the-urban-fringe-111339">Living 'liveable': this is what residents have to say about life on the urban fringe</a>
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</em>
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<h2>What does this mean for planning policy in Australia?</h2>
<p>Housing strategies must consider transport when deciding land-use plans and where to develop new housing estates. This more holistic approach would produce better outcomes by reducing cost pressures on households. </p>
<p>Such an approach would likely result in higher housing densities closer to the CBD and other employment centres. It should also get decision-makers to focus more on providing better public transport for outer suburbs and other areas that lack good transport services.</p>
<p>One obstacle to an integrated approach by Australian policymakers is that they lack a way to easily assess the combined housing and transport costs. While the VAMPIRE index was a step in the right direction, Australia needs a regularly updated and more focused tool like the above-mentioned H+T Index and Housing and Transportation Affordability Indicator.</p><img src="https://counter.theconversation.com/content/204807/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Neil G Sipe has received funding from the Australian Research Council. </span></em></p>People in search of more affordable housing gravitate to the outer suburbs, but may then find higher transport costs erase the benefit of lower mortgage payments.Neil G Sipe, Honorary Professor of Planning, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2053362023-05-17T10:46:24Z2023-05-17T10:46:24ZMortgage lenders are relaxing their rules – here’s why that could be risky for borrowers<figure><img src="https://images.theconversation.com/files/526553/original/file-20230516-17-melcmo.jpg?ixlib=rb-1.1.0&rect=137%2C47%2C3856%2C2443&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Budgeting to buy a home.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/buying-selling-houses-real-estate-prices-1032268546">Tero Vesalainen/Shutterstock</a></span></figcaption></figure><p>The Bank of England increased its base rate yet again in May 2023 to 4.5%, pushing borrowing costs to the <a href="https://theconversation.com/bank-of-england-interest-rate-rise-why-this-could-be-the-last-increase-for-a-while-205337">highest level in almost 15 years</a>. More than <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">6 million UK households</a> will now see their mortgage payments increase by the end of 2025, with more than <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">4 million</a> experiencing this in 2023.</p>
<p>For an average household this would mean an increase from <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">£750 to £1,000 in monthly payments</a> – or around 17% of average pre-tax income compared to 12% in June 2022. As the pressure of increasing interest costs, as well as rising house prices, weighs on households, mortgage lenders are developing and offering borrowers different kinds of products in response. </p>
<p>UK lender Skipton Building Society <a href="https://www.skipton.co.uk/press-office/press-release-article?BlogID=%7B13A47958-66DB-4D1A-B686-F7BFCF3FD742%7D">recently launched a 100% or no-deposit mortgage</a> as “a lifeline to tenants across the country, to help them break out of their trapped rental cycles and onto the property ladder for the first time”. Alternatively, <a href="https://www.ftadviser.com/mortgages/2019/06/26/most-mortgages-now-have-40-year-terms/?utm_campaign=FTAdviser+news&utm_source=emailCampaign&utm_medium=email&utm_content=">home loans that last as long as 40 years</a> – so-called <a href="https://www.thisismoney.co.uk/money/mortgageshome/article-12079901/63-000-thats-extra-cost-150-000-marathon-mortgage.html">marathon mortgages</a> – are on the rise. They can make it easier for some people to get on the property ladder by stretching out payments over a longer period.</p>
<p>But mortgage lending criteria were <a href="https://www.tandfonline.com/doi/full/10.1080/14616718.2011.548585?scroll=top&needAccess=true&role=tab&aria-labelledby=full-article">tightened for good reason after the 2008 global financial crisis</a>. And while these recent relaxations may be designed to help struggling would-be borrowers trapped in rising interest rate, rent and house price hell, hopeful homeowners should be very cautious about the risks involved.</p>
<h2>Long-term loans</h2>
<p>Prior to 2007, mortgage terms were rarely longer than 25 years. Only about 21% of first-time borrowers and 8% of remortgages opted for such a long term in December 2007. While <a href="https://www.zoopla.co.uk/discover/property-news/uk-lender-offers-40-year-fixed-rate-mortgage/">one lender</a> started offering a 40-year fixed rate product at the end of 2021, marathon mortgages are long-term loans but don’t typically offer a fixed rate for the length of the loan. By 2022 more than 55% of first-time borrowers and 34% of remortgagers had <a href="https://www.ukfinance.org.uk/system/files/2023-03/Household%20Finance%20Review%202022%20Q4.pdf">home loans with terms of more than 30 years</a>.</p>
<p><strong>Mortgage terms are getting longer</strong></p>
<p>This recent resurgence is most likely due to the affordability benefits of marathon mortgages. <a href="https://theconversation.com/five-ways-to-reduce-your-mortgage-repayments-in-2023-and-why-rates-have-risen-so-high-196327">Extending the term of a loan allows borrowers</a> to stretch out the repayment costs of a mortgage over time. It also allows people to purchase a more expensive home – an important benefit in today’s market where average house prices have rocketed from £190,000 in 2009 to just shy of £300,000 in 2023.</p>
<p><strong>House prices have been rising</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing rising UK average house prices since 2005." src="https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=339&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=339&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=339&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=427&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=427&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=427&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/previousReleases">Office for National Statistics UK House Price Index</a></span>
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<p>Long-term mortgages also help borrowers qualify for mortgages under the <a href="https://www.fca.org.uk/news/press-releases/new-mortgage-rules-come-force">stricter affordability rules</a> introduced by the UK’s financial regulator in 2014. These rules require lenders to ensure that borrowers have sufficient monthly income to cover living expenses and other debts after their mortgage payments. </p>
<p>Spreading the cost to around 40 years allows marathon mortgage holders to reduce monthly costs, passing affordability assessments. Marathon mortgages do not seem to be a current concern for the regulator.</p>
<p>Of course, a marathon mortgage borrower could shorten their term over the years as they remortgage to avoid the lender’s standard variable rate. Also, if the base rate decreases over time, interest payments will fall and the overall mortgage will become more affordable. And, of course, any future increase in income allows a borrower to overpay during the term of the loan.</p>
<p>On the the other hand, long-term borrowing means significantly higher interest payments. For example, <a href="https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/">a household borrowing £250,000 at a rate of 5% for 25 years</a> would pay a total of £188,600 in interest over the lifetime of the mortgage (assuming, for simplicity, that the interest rate does not change over the life of the mortgage). But borrowing for 40 years would result in total interest payments of £328,930 – a staggering £140,330 difference.</p>
<p>Marathon mortgages may also mean borrowers must make repayments <a href="https://www.ukfinance.org.uk/system/files/2023-03/Household%20Finance%20Review%202022%20Q4.pdf">well into their 70s</a> considering the <a href="https://www.money.co.uk/mortgages/first-time-buyer-mortgages/statistics">average age for first-time buyers outside London is now around 33</a>. For some this may mean continuing to pay a mortgage into retirement. This should be a key consideration when considering long-term borrowing. It would certainly impact financial security after retirement so careful planning and independent financial advice is crucial.</p>
<figure class="align-center ">
<img alt="Hands cupped underneath chart showing rising house values." src="https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/rising-house-sales-concept-742144642">Sasun Bughdaryan/Shutterstock</a></span>
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<h2>No-deposit mortgages</h2>
<p>Rising rents, coupled with <a href="https://www.ft.com/content/0ebcf348-a664-442c-9311-5443e2d80f53">soaring prices of other essential expenses</a> such as food and energy bills, have left many first-time buyers struggling to save for a deposit. No-deposit products help first-time buyers break this cycle by swapping rental costs with mortgage payments, allowing them to eventually own their home. </p>
<p>Skipton Building Society’s recent launch of a <a href="https://www.skipton.co.uk/mortgages/track-record-mortgage">“100% mortgage”, which means borrowers don’t need a deposit</a>, aims to help first-time buyers of homes of up to £600,000 get onto the property ladder. </p>
<p>Such products were commonly available before the 2008 financial crisis. But the sharp fall in house prices since – mainly the 20% drop between 2007 and 2009 – <a href="https://www.ft.com/content/f067f31e-56c8-11de-9a1c-00144feabdc0">is reported to have left around a million households stuck in negative equity</a>. This is when your home is worth less than the mortgage you owe on it, leaving you unable to sell your properties.</p>
<p>The danger now is that the average house price today is much higher than the pre-financial crisis period (£300,000 versus £190,000). So, if such price drop were to happen in the near future, the impact would be even more devastating for no-deposit mortgagers. Although a crash does not seem to be on the cards, <a href="https://www.halifax.co.uk/assets/pdf/april-2023-house-price-index.pdf">downward pressure on house prices is expected</a>. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/uk-house-prices-history-says-the-market-is-in-for-a-long-slowdown-not-a-crash-186072">UK house prices: history says the market is in for a long slowdown not a crash</a>
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<p>As we experienced in the aftermath of the 2008 financial crisis, relaxed lending criteria combined with borrowing beyond means can have dire consequences. It’s important for borrowers to be aware of these risks and to be very cautious when thinking about borrowing for the long term, particularly without a deposit.</p><img src="https://counter.theconversation.com/content/205336/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New mortgage products designed to help struggling first-time buyers hark back to the pre-2008 market and so should come with a warning.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1888172022-08-31T01:54:14Z2022-08-31T01:54:14ZI’m considering an interest-only home loan. What do I need to know?<figure><img src="https://images.theconversation.com/files/480308/original/file-20220822-54947-qmv2tv.jpg?ixlib=rb-1.1.0&rect=0%2C29%2C3992%2C2958&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Chuttersnap/Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>An <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans">interest-only home loan</a>, as the name suggests, is where you only pay the interest on a loan and not the principal (the original amount you borrowed).</p>
<p>While authorities such as the Reserve Bank often <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">see</a> them as risky, interest-only loans can be helpful in some circumstances.</p>
<p>If you’re considering an interest-only loan, here’s what you need to know.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/more-rented-more-mortgaged-less-owned-what-the-census-tells-us-about-housing-185893">More rented, more mortgaged, less owned: what the census tells us about housing</a>
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</em>
</p>
<hr>
<h2>How long do they go for?</h2>
<p>These loans are typically last for five years at most, before reverting back to principal and interest (where you have to pay back, through regular payments, both interest and the initial sum you borrowed).</p>
<p>You could potentially apply for another interest-only loan after your first one winds up, perhaps by refinancing (where you take a new mortgage to repay an existing loan). But you might not get it – and you’d still have to pay off the principal eventually.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Interest-only loans can cost you a lot more in interest over time than a regular principal and interest loan.</span>
<span class="attribution"><span class="source">Photo by Andrew Mead on Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What are the upsides of an interest-only loan?</h2>
<p>An interest-only loan means you’ll have more cash available to cover other costs, or invest elsewhere.</p>
<p>You can use a <a href="https://moneysmart.gov.au/home-loans/mortgage-calculator">mortgage calculator</a> to work out how much extra cash you’d have if you switched from a principal and interest loan to an interest-only loan. It’s typically hundreds of dollars per week. </p>
<p>This may get you a bit more wriggle room for daily expenses. Or, some people use the extra cash to invest in other things – such as shares – in the hope they can make more money overall and pick up some tax benefits along the way. That’s why interest-only loans are often popular among <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans">investors</a>. Of course, this strategy comes with risk. </p>
<p>An interest-only loan may also have a redraw facility, allowing you to add extra payments into the loan (above and beyond the interest) if you want, and withdraw money later when you need cash. This can allow people to avoid a personal loan, which usually has a much higher interest rate.</p>
<p>Regular principal and interest loans may also have a redraw facility but the regular payments of principal are unavailable for redraw. That means less flexibility for the borrower. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">What’s right for one borrower won’t be for the next.</span>
<span class="attribution"><span class="source">Image by Pfüderi from Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What are the downsides?</h2>
<p>The interest rates on interest-only loans are generally higher than principal and interest loans.</p>
<p>For example, the RBA July 2022 <a href="https://www.rba.gov.au/statistics/tables/xls/f05hist.xls">indicator rate</a> for owner-occupier interest-only rates is 6.31%.</p>
<p>But the equivalent variable rate for principal and interest loans is 5.77% (the indicator rate is just a guide; the actual difference varies from bank to bank).</p>
<p>Interest-only loans can cost you a lot more over time than a regular principal and interest loan.</p>
<p>This means a borrower needs to manage their finances well to ensure they can cover the interest payments now and still have enough to pay down the principal eventually. So you’ll need a plan for how you’re going to do that when the interest-only loan ends.</p>
<p>There is also a risk of a shock – such as job loss, personal crisis or housing crash – causing the borrower to default on the loan altogether. </p>
<p>If the borrower defaults on an interest-only loan, they may lose the house and the bank is left with a debt that was not substantially repaid (because the borrower had not yet made a dent in the principal). It’s a lose-lose situation.</p>
<h2>Are interest-only loans common?</h2>
<p>Interest-only loans represent <a href="https://www.apra.gov.au/news-and-publications/apra-releases-quarterly-authorised-deposit-taking-institution-statistics-11">11.3% of all home loans</a> in Australia.</p>
<p>This figure has been <a href="https://www.rba.gov.au/publications/fsr/2017/apr/box-b.html">trending down</a> over the past five years, due in part to tighter <a href="https://www.apra.gov.au/news-and-publications/apra-to-remove-interest-only-benchmark-for-residential-mortgage-lending">lending restrictions</a> and the fact low interest rates have made principal and interest loans relatively cheap recently.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Interest-only loans represent 11.3% of all home loans in Australia.</span>
<span class="attribution"><span class="source">Image by sandid from Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What does the research say?</h2>
<p>One Dutch <a href="https://link.springer.com/article/10.1007/s11146-013-9453-9">study</a> found “households that are more risk-averse and less literate are significantly less likely to choose an interest-only mortgage”. This partly due to lower initial repayments and wealthy households preferring the financial flexibility.</p>
<p>Interest-only borrowing has also been found to <a href="https://www.sciencedirect.com/journal/journal-of-housing-economics">fuel</a> <a href="https://doi.org/10.1016/j.regsciurbeco.2018.06.004">housing</a> <a href="https://www.sciencedirect.com/science/article/pii/S1094202520300776?via%3Dihub">speculation</a> and reduce housing affordability. </p>
<p>A US study found borrowers also tend to <a href="https://doi.org/10.1093/rof/rfy016">default</a> more.</p>
<p>A Danish <a href="https://doi.org/10.1162/rest_a_01146">study</a> found that once the interest-only lower repayment period is over and the loan reverts to principal and interest, those who didn’t make principal repayments suffered a large drop in disposable income.</p>
<h2>Financial flexibility comes with a catch</h2>
<p>With rates rising, interest-only loans may sound like an appealing way to have more cash available to cover other costs in life.</p>
<p>But just remember financial flexibility comes with a catch. An interest-only loan could be more expensive in the long run. </p>
<p>For some people, that cost will be worth it if it allows them to hold onto the house during a brief tough period or make more money investing elsewhere. But it’s a risk.</p>
<p>And when the interest-only loan ends, you’re still stuck with the task of paying off the money you borrowed from the bank in the first place (with interest).</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/should-i-pay-off-the-mortgage-asap-or-top-up-my-superannuation-4-questions-to-ask-yourself-170470">Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself</a>
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</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/188817/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adrian Lee does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While authorities such as the Reserve Bank often see them as risky, interest-only loans can be helpful in some circumstances.Adrian Lee, Associate Professor in Property and Real Estate, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1888912022-08-22T20:01:52Z2022-08-22T20:01:52ZWhat happens if I can’t pay my mortgage and what are my options?<figure><img src="https://images.theconversation.com/files/480027/original/file-20220819-25-12veju.jpg?ixlib=rb-1.1.0&rect=0%2C5%2C3988%2C2233&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Photo by Pat Whelen on Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>With rising costs of living, including interest rate rises, many people are really worried about their mortgage. </p>
<p>So, what actually happens if you can’t pay your mortgage – and what are your options?</p>
<p>Here’s what you need to know.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-to-fix-australias-housing-affordability-crisis-negative-gearing-must-go-158518">Vital signs: to fix Australia's housing affordability crisis, negative gearing must go</a>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">It’s not particularly rare for a borrower to face a period of temporary financial hardship.</span>
<span class="attribution"><span class="source">Photo by Tierra Mallorca on Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Payment deferrals, payment plans or getting fees waived</h2>
<p>It’s not particularly rare for a borrower to face a period of temporary financial hardship, often due to circumstances beyond their control. </p>
<p><a href="https://www.rba.gov.au/publications/bulletin/2021/sep/the-financial-cost-of-job-loss-in-australia.html">Job loss</a>, relationship breakdowns, natural disasters, injuries and illnesses all affect the capacity of householders to repay their loan, especially given mortgages tend to run over many years, if not decades.</p>
<p>Banks have “hardship” processes to deal with borrowers who are temporarily unable to repay their loan.</p>
<p>The <a href="https://www.ausbanking.org.au/">Banking Code of Practice</a>, to which most banks subscribe, provides guidelines for lenders to help consumers through financial difficulties. </p>
<p>One form of relief is a payment deferral or “holiday”. That’s where a customer is able to postpone repayments until the issue causing hardship is resolved. Many people used this option during COVID lockdowns. </p>
<p>However, a payment holiday sometimes simply “kicks the can down the road” and the customer is still in financial trouble when their temporary payment holiday ends.</p>
<p>Other options include payment plans. This is where you pay back less per month but the mortgage lasts longer overall. </p>
<p>Or, the bank may simply offer advice on how to handle finances until you’re back on your feet. </p>
<p>It is also possible for banks to waive discretionary fees (such as those related to overdue payments).</p>
<h2>Banks don’t really want you to default</h2>
<p>Banks typically do not want their customers to default on property.</p>
<p>They’re usually protected against losses themselves through lender’s mortgage insurance, but banks see mortgage holders as particularly valuable customers. They have shown they can obtain finance and repay loans. </p>
<p>Usually, it’s easier for the bank to make hardship arrangements with a customer - and build trust along the way - than it is to wind up a mortgage, seize the property and then have to deal with trying to sell it in a flagging market.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mortgagee-in-possession can lead to lower sale price.</span>
<span class="attribution"><span class="source">Photo by RODNAE Productions/Pexels</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What about my credit score?</h2>
<p>Recent <a href="https://www.creditsmart.org.au/financial-hardship/changes-to-credit-reporting-from-july-2022/">changes</a> to the credit legislation make it easier to apply for a payment plan without affecting your credit score. </p>
<p>From July 1, 2022, under the terms of a financial hardship arrangement, a customer’s credit report will show they have made on time repayments for the period of the arrangement – providing they have followed the terms of the hardship agreement.</p>
<p>Credit reports will also indicate whether (but not why) a customer is in a financial hardship arrangement.</p>
<p>This information stays on a credit report for one year, then disappears. </p>
<p>Importantly, though, hardship information will be visible to other credit providers, and may affect a customer’s ability to get other loans during the period.</p>
<h2>I’m struggling. So what should I do?</h2>
<p>Contact your financial institution as early as you can. Your bank may be able to offer payment relief in the form of reduced payments or a holiday from repayments – or a combination of both. </p>
<p>You usually need to provide evidence for the reason for financial hardship, and there’s an expectation you’ll be able to resume repayments when the temporary issue is resolved.</p>
<p>Not every application for hardship will be successful, particularly if you have made promises to repay in the past and not followed through.</p>
<p><a href="https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance">Income protection insurance</a> (for those who plan for uncertainties) may help prevent the need for hardship arrangements in the first place.</p>
<p>If you see the issue as ongoing, rather than temporary, consider a different approach.</p>
<p>If you’re ahead on your mortgage (as many Australians were during the pandemic), or you have significant equity in your house, consider refinancing. That’s where you take out a new mortgage to repay an existing loan.</p>
<p>You may be able to get a lower monthly repayment, especially if you have built an equity stake greater than 30%.</p>
<p>It won’t always be an option, especially if you are a recent borrower facing rising interest rates, stagnant or falling house prices, and have limited equity. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A growing number of Australians are worried about their home loan.</span>
<span class="attribution"><span class="source">Photo by mentatdgt/Pexels</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>In dire circumstances, you may be able to <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/early-access-to-your-super/">access your superannuation early</a> (which means you may have a lot less to retire on).</p>
<p>If you really do need to sell, it is better to sell the property of your own volition, rather than having a forced sale.</p>
<p>Mortgagee-in-possession (which is where the bank sells the house) can often lead to a lower sales price than a vendor-led campaign, and the time frame may not suit you.</p>
<p>Free help is available. The <a href="https://www.arca.asn.au/">Australian Retail Credit Association</a> provides information on how hardship processes are reported, while the <a href="https://financialrights.org.au/factsheets/mortgage-stress/">Financial Rights Legal Centre</a> helps advocate for consumers through the mortgage stress process.</p>
<p>The government’s <a href="https://moneysmart.gov.au/managing-debt/financial-hardship">Moneysmart</a> site also provides information on how to navigate the hardship process.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-housing-game-has-changed-interest-rate-hikes-hurt-more-than-before-184553">The housing game has changed – interest rate hikes hurt more than before</a>
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<img src="https://counter.theconversation.com/content/188891/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Grant is affiliated with the Australian Institute of Credit Management, and has conducted research in the past for Commonwealth Bank and the credit bureau Illion. This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>Banks typically do not want their customers to default on property and have processes in place to help reduce the risk of this happening.Andrew Grant, Senior Lecturer in Finance, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1412742020-06-24T20:18:20Z2020-06-24T20:18:20ZMortgage deferral, rent relief and bankruptcy: what you need to know if you have coronavirus money problems<figure><img src="https://images.theconversation.com/files/343372/original/file-20200623-188931-16vvu78.jpg?ixlib=rb-1.1.0&rect=9%2C0%2C5997%2C4016&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The coronavirus pandemic has wreaked havoc on the Australian economy, and the financial effects for many are deeply personal.</p>
<p>Sadly, there’s no shortage of terrible advice online when it comes to personal finance. And as September 30 looms - the date by which JobKeeper, the increased JobSeeker and many negotiated rent and mortgage deferrals end - it’s important to be fully informed before you make potentially life-changing financial decisions.</p>
<p>As a former financial counsellor and former consumer credit educator for the Australian Securities and Investments Commission (ASIC), here’s what I think you need to know if you’re considering mortgage deferral, rent relief or bankruptcy.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/going-bankrupt-is-a-life-changing-decision-so-why-is-the-process-to-do-it-so-easy-64971">Going bankrupt is a life changing decision – so why is the process to do it so easy?</a>
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<hr>
<h2>Mortgage deferral</h2>
<p>Residential mortgages are covered by <a href="https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-209-credit-licensing-responsible-lending-conduct/">federal legislation</a>, under which lenders can assist when borrowers can’t afford their usual repayments due to changed circumstances — such as losing hours or employment.</p>
<p>For example, you can ask your lender put on hold payments from June to September. It’s up to you and the creditor to establish clearly what happens to those payments. Are they pushed to the end of the contract, thereby extending the life of your loan? Or will you repay extra when you can afford repayments again? </p>
<p>Make sure you understand how much more it will cost you in additional interest if you extend the life of your loan by deferring these payments to the end of the contract. Depending on the details of your loan, you could be adding thousands of dollars to the amount you need to repay.</p>
<p>Most mortgage lenders don’t really want to repossess your house. It’s costly, time-consuming and stressful. But before asking for mortgage relief, you need to have a plan for the post-deferral period. </p>
<p>What happens if you still can’t make your usual repayments? Any licensed financial professional should be able to help negotiate a deferral on your mortgage or other consumer debts such as credit cards, but you should first consider seeing a free financial counsellor who is independent of any lenders. They can be contacted on 1800 007 007 or through the <a href="https://ndh.org.au/">National Debt Helpline</a> </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343374/original/file-20200623-188904-f06gjl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Before asking for debt relief, you need to have a plan for the post-deferral period.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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</figure>
<h2>Rent relief</h2>
<p>If you can’t pay your rent due to changed circumstances, you can ask your landlord to reduce or defer your rent. They can, of course, say no.</p>
<p>Unlike mortgage deferral, the implementation and process is inconsistent across states and territories. It can be difficult to navigate. </p>
<p>There are <a href="https://www.sbs.com.au/news/regulator-to-crack-down-on-real-estate-agents-pressuring-tenants-to-use-super">reports</a> of some landlords asking for comprehensive financial statements to support claims, or for their tenants to access the early release of up to <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/Early-access-to-your-super/#Compassionategrounds">A$10,000 in superannuation</a> to pay the rent. </p>
<p>Ausralia’s corporate watchdog, the Australian Securities and Investments Commission (ASIC), has <a href="https://download.asic.gov.au/media/5546344/asic-letter-response-to-early-release-of-super-state-rei-3-april-2020.pdf">warned real estate agents</a> that advising tenants to take money from their superannuation may constitute giving unlicensed financial advice and/or be against people’s best interests, attracting possible fines and jail time.</p>
<p>If you’re talking with your landlord about rent relief, be clear on whether you’re talking about rent payments being reduced, deferred or permanently waived, and whether these payments would need to be made up by a certain date. Renters can seek help from <a href="https://ndh.org.au/">free financial counsellors</a> or a <a href="https://www.tenants.org.au/covid19/guide">tenants’ union</a>. </p>
<p>State and territory governments have established various schemes to help renters work out agreements with their landlord (see this <a href="https://www.commerce.wa.gov.au/consumer-protection/covid-19-residential-tenancies-mandatory-conciliation-service">Western Australian</a> scheme as an example).</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-if-i-cant-pay-my-rent-these-are-the-options-for-rent-relief-in-australia-135312">What if I can't pay my rent? These are the options for rent relief in Australia</a>
</strong>
</em>
</p>
<hr>
<h2>Bankruptcy</h2>
<p>Bankruptcy should be a last resort. Many creditors have shown they’re willing to provide short-term delays (for about 90 days, for example) if people need more time to pay a debt.</p>
<p>Consumer credit contracts are written on the basis that life has its ups and downs and if a debtor genuinely can’t pay, the creditor can help by reducing payments, stopping interest charges, deferring payments and/or restructuring loans.</p>
<p>In almost all consumer bankruptcies, there is no return to creditors so they generally don’t want debtors to go bankrupt. It’s in their interest to help debtors through a difficult period so they can return to making payments. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343637/original/file-20200624-132385-1fpjsa4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Call the National Debt Hotline before you make any big decisions around bankruptcy.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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</figure>
<p>Of great concern to consumer advocates is that searching “bankruptcy” or “help with debts” on the internet will often generate results for companies with a vested interest in placing you in what’s called a “debt agreement”. These should be approached with caution. It basically means you pay for a company to help you declare bankruptcy - but this is unnecessary. </p>
<p>A debt agreement is an act of bankruptcy that directs fees to those companies and quite often places consumers in unmanageable and unsustainable long-term repayment plans. </p>
<p>Instead, try to find free financial counsellors, some of whom work for charities. They are professional, unbiased and expert at informing people of their options when in debt. They can be found via the government’s <a href="https://moneysmart.gov.au/managing-debt/financial-counselling">MoneySmart</a> site.</p>
<p>If you can’t pay your debts, there are many <a href="https://www.afsa.gov.au/debtrelief">options available</a>. The key is contacting the right person or organisation - and knowing whatever comes up first in a Google search is not necessarily the best or most impartial place to get help in a financial crisis.</p><img src="https://counter.theconversation.com/content/141274/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory Mowle is a former financial counsellor and former consumer credit educator for ASIC.</span></em></p>As a former financial counsellor and former consumer credit educator for ASIC, here’s what I think you need to know if you’re considering mortgage deferral, rent relief or bankruptcy.Gregory Mowle, Lecturer in Finance, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1341482020-03-23T03:50:48Z2020-03-23T03:50:48ZWhy housing evictions must be suspended to defend us against coronavirus<figure><img src="https://images.theconversation.com/files/322208/original/file-20200323-22610-asi5im.jpg?ixlib=rb-1.1.0&rect=0%2C25%2C5760%2C3802&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Antonio Guillem/Shutterstock</span></span></figcaption></figure><p>The COVID-19 pandemic is a double crisis affecting public health and the economy. And both aspects are playing out in our housing system – in our homes. </p>
<p>More and more of us are being directed to stay home, to work from home, or to socially isolate at home. Our homes are the “first line of defence against the COVID-19 outbreak”, as the UN’s Special Rapporteur on Housing <a href="https://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=25727&LangID=E">puts it</a>. But, depending on how our housing system responds, it could make the double crisis worse. </p>
<p>More and more workers are <a href="https://theconversation.com/coronavirus-puts-casual-workers-at-risk-of-homelessness-unless-they-get-more-support-133782">losing shifts</a>, or <a href="https://www.canberratimes.com.au/story/6687586/coronavirus-australia-preparing-for-significant-rise-in-unemployment/">losing jobs</a> altogether, as well as the incomes they use to pay for their homes – whether it’s the rent or the mortgage. On Friday, the prime minister announced that states would work on model rules to provide relief to tenants in “hardship conditions”. On Sunday, the federal government moved to replace some of the income households have lost, <a href="https://www.pm.gov.au/media/supporting-australian-workers-and-business">temporarily doubling some social security payments and making cash grants to businesses</a>.</p>
<p>The risk of people becoming homeless during the pandemic is still high. Some more specific actions are needed to shore up our first line of defence. Governments must implement a moratorium on evictions as long as the crisis lasts. Similar changes have already been made overseas. </p>
<h2>Evictions can happen quickly</h2>
<p>A sudden loss of wages puts renters at risk of arrears and owner-occupiers at risk of mortgage default. This may result in legal proceedings to terminate the tenancy or give possession to the bank or other lender, and ultimately eviction. Tenants are vulnerable to termination and eviction for a host of other reasons, too. </p>
<p>Renters are at particular risk because rent arrears termination proceedings are quick. You can go from a missed payment to termination orders in about eight weeks in New South Wales. Other states and territories are similar. </p>
<p>Many renters’ finances are <a href="https://theconversation.com/coronavirus-puts-casual-workers-at-risk-of-homelessness-unless-they-get-more-support-133782">already precarious</a>. About <a href="https://www.afr.com/companies/financial-services/one-in-five-households-facing-mortgage-stress-despite-low-rates-20191223-p53mfn">one-third</a> of private renters are low-income households in housing stress (in the bottom 40% of household incomes paying more than 30% of income in rent). And 30% <a href="https://www.pc.gov.au/research/completed/renters">don’t have $500 saved</a> for an emergency. </p>
<p>Homeowners with a mortgage are also at risk of default due to loss of income. About <a href="https://digitalfinanceanalytics.com/blog/mortgage-stress-still-climbed-in-february">20% of mortgagees</a> are already in mortgage stress. This rate has <a href="https://digitalfinanceanalytics.com/blog/mortgage-stress-still-climbed-in-february">grown over the last year</a> despite rate cuts. </p>
<p>Now workers are facing sudden income and job losses. We see widespread evidence of an economic downturn across many sectors, including <a href="https://theconversation.com/the-end-of-global-travel-as-we-know-it-an-opportunity-for-sustainable-tourism-133783">tourism</a>, <a href="https://www.theguardian.com/world/2020/mar/18/theyre-going-to-go-under-australias-coronavirus-hit-restaurants-bars-and-caterers-seek-bailout">hospitality</a> and the <a href="https://theconversation.com/coronavirus-australian-arts-need-a-stimulus-package-here-is-what-it-should-look-like-133803">arts</a>. Casual workers are at particular risk of reduced income if required to <a href="https://www.health.nsw.gov.au/Infectious/factsheets/Pages/contacts-and-travellers.aspx">self-isolate</a> for long periods or care for unwell family members.</p>
<h2>A breach of our defences</h2>
<p>An eviction is a breach in the first line of defence that housing provides against COVID-19. In fact, the risk of arrears and eviction might drive an infected person to keep working and transmitting the virus. </p>
<p>An evicted household might pile in with family or friends, disrupting social isolation and contributing to unsanitary overcrowding. It’s a challenge people already living in share housing will have to manage. Across Australia, 81,000 dwellings are already overcrowded, <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/2049.0Main+Features12016?OpenDocument">51,000 of these “severely overcrowded”</a>. </p>
<p>People who have been evicted might move through temporary accommodation, and through real estate offices, social services and doctors’ rooms making urgent applications. Or they may be shut out of assistance, and sleeping rough. With limited space and facilities to wash hands and personal effects, the risk of transmission will grow.</p>
<h2>How would a moratorium work?</h2>
<p>These risks justify a government-imposed moratorium on evictions for the duration of the crisis. This could be done through legislation, or through an emergency executive direction to authorised officers to stop evictions. Other countries have already taken such steps.</p>
<p>In the United States, many states and cities have <a href="https://www.antievictionmap.com/blog/2020/3/19/covid-19-emergency-tenant-protections-map">suspended eviction proceedings against tenants</a>. Federal housing finance agencies have implemented <a href="https://www.washingtonpost.com/business/2020/03/18/hud-orders-60-day-foreclosure-moratorium-homeowners-affected-by-coronavirus/">a 60-day moratorium to protect some families from mortgage default</a>.</p>
<p>Ireland has also suspended evictions and <a href="https://www.rte.ie/news/coronavirus/2020/0319/1124168-evictions-ban-coronavirus/">temporarily frozen rent increases</a>. In the United Kingdom, renters in the private or social sector are <a href="https://www.gov.uk/government/news/complete-ban-on-evictions-and-additional-protection-for-renters">to be protected from eviction</a>. </p>
<p>A moratorium on evictions is an obvious triage measure. That’s why in Australia a <a href="https://actionnetwork.org/petitions/protect-our-communities-no-evictions-during-a-health-crisis">community coalition</a> has come together to advocate for no evictions during this crisis. You can show your support by <a href="https://actionnetwork.org/petitions/protect-our-communities-no-evictions-during-a-health-crisis">signing the petition</a>. </p>
<p>The <a href="https://www.smartpropertyinvestment.com.au/management/20864-federal-opposition-leads-eviction-moratorium-call">federal opposition is urging</a> the government and financial institutions to consider similar measures. </p>
<h2>What about the mounting debts?</h2>
<p>By itself, an eviction moratorium doesn’t affect the legal liability to pay rent or mortgage instalments. Without anything more, those liabilities would continue. </p>
<p>The federal government’s increased social security payments and business grants will go some way to replacing the income households are losing. But even as the government tips money into households, money is drained away by rents and mortgage payments. </p>
<p>About <a href="https://data.gov.au/data/dataset/540e3eac-f2df-48d1-9bc0-fbe8dfec641f/resource/81cea29d-9c28-4f55-b818-314edf5d2cc2/download/ts17individual26rentalpropertyschedulesbystatenetrentpositionyear.xlsx">A$40 billion</a> is due to flow out of Australia’s 2.5 million private renter households and into 1.3 million landlord households. Landlord households have, on average, much <a href="https://www.tandfonline.com/doi/full/10.1080/02673037.2019.1644297">higher incomes and wealth</a> than other households.</p>
<p>Billions more are due to flow, as principal and interest payments, from 3.4 million owner-occupier mortgagees to the banks. Australia’s big four banks last week announced borrowers could <a href="https://www.abc.net.au/news/2020-03-21/mortgage-pause-coronavirus-nab-commonwealth-anz-westpac/12076690">“pause” their payments</a> as a pandemic hardship measure. But mortgagees should be aware interest not paid is capitalised into the debt, so they will have more to pay off after the “pause” ends.</p>
<p>Both to prevent the accumulation of arrears, and to make the government’s income-replacement measures more effective, governments should consider implementing reductions or waivers of rent and interest liabilities for as long as the crisis lasts.</p>
<p>The double crisis of the COVID-19 pandemic needs a dual response that aims to keep households in their homes and to keep income in households.</p><img src="https://counter.theconversation.com/content/134148/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sophia Maalsen receives funding from the Australian Research Council (ARC) and the Australian Housing and Urban Research Institute (AHURI). </span></em></p><p class="fine-print"><em><span>Chris Martin receives funding from the Australian Housing and Urban Research Institute (AHURI).</span></em></p><p class="fine-print"><em><span>Dallas Rogers recently received funding from The Henry Halloran Trust, Australian Housing and Urban Research Institute (AHURI), Urban Growth NSW/Landcom, University of Sydney, Western Sydney University, and Community Broadcasting Association of Australia (CBAA).</span></em></p><p class="fine-print"><em><span>Emma Power has received recent funding from the Australian Research Council, Australian Housing and Urban Research Institute (AHURI), Common Equity NSW and Landcom. </span></em></p>Housing is our first line of defence against coronavirus, so leaving someone homeless increases the risk for everyone. Australia should follow other countries in imposing a moratorium on evictions.Sophia Maalsen, ARC DECRA Fellow and Lecturer in Urbanism, School of Architecture, Design and Planning, University of SydneyChris Martin, Senior Research Fellow, City Futures Research Centre, UNSW SydneyDallas Rogers, Program Director, Master of Urbanism, School of Architecture, Design and Planning, University of SydneyEmma Power, Senior Research Fellow, Geography and Urban Studies, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1151342019-06-11T20:13:14Z2019-06-11T20:13:14ZMore of us are retiring with mortgage debts. The implications are huge<figure><img src="https://images.theconversation.com/files/278662/original/file-20190610-52776-8qf5ob.jpg?ixlib=rb-1.1.0&rect=399%2C535%2C4217%2C1818&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Half a million Australians aged 50 and over lost their homes in the first decade of this century.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The number of mature age Australians carrying mortgage debt into retirement is soaring. </p>
<p>And on average each mature age Australian with a mortgage debt owes much more relative to their income than 25 years ago. </p>
<p>Microdata from the Bureau of Statistics <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6541.0.30.001Main+Features12013-14">survey of income and housing</a> shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015. The sharpest increase is among homeowners approaching retirement. </p>
<h2>More mortgaged for longer</h2>
<p>For home owners aged 55 to 64 years, the proportion owing money on mortgages has tripled from 14% to 47%. </p>
<p>Among home owners aged 45 to 54 years, it has doubled.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=276&fit=crop&dpr=1 600w, https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=276&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=276&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=347&fit=crop&dpr=1 754w, https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=347&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/278480/original/file-20190607-52741-1gvtikf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=347&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6503.0Main+Features12015-16">Source: Authors’ own calculations from the Surveys of Income and Housing</a></span>
</figcaption>
</figure>
<hr>
<p>Meanwhile, the average mortgage debt-to-income ratio among those with mortgages has pretty much doubled across every home-owning age group. </p>
<p>In the 45-54 age group the mortgage debt-to-income ratio has blown out from 82% to 169%. </p>
<p>For those aged 55-64 it has blown out from 72% to 132%. </p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=275&fit=crop&dpr=1 600w, https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=275&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=275&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=346&fit=crop&dpr=1 754w, https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=346&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/278619/original/file-20190610-52758-wdha1w.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=346&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Source: Authors’ own calculations from the Surveys of Income and Housing</span></span>
</figcaption>
</figure>
<hr>
<h2>Three reasons why</h2>
<p>The soaring rates of mortgage indebtedness among older Australians have been driven by three distinct factors. </p>
<p>First, property prices have surged ahead of incomes. </p>
<p>Since 1970 the national dwelling price to income ratio <a href="https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf">has doubled</a>. </p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=293&fit=crop&dpr=1 600w, https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=293&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=293&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=368&fit=crop&dpr=1 754w, https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=368&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/278624/original/file-20190610-52780-1hzmy9f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=368&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Prices and wages in 1970 are assigned an index of 100.</span>
<span class="attribution"><a class="source" href="https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf">Sources: Treasury, ABS, Committee for Economic Development of Australia</a></span>
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<p>Despite weaker property prices, the ratio remains historically high. This means households have to borrow more to buy a home. It also delays the transition into home ownership, <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/4130.0%7E2015-16%7EMain%20Features%7EAcross%20the%20Generations:%20Twenty%20years%20of%20housing%7E10003">potentially shortening</a> the the remaining working life available to repay the loan.</p>
<p>Second, today’s home owners frequently use flexible mortgage products to draw down on their housing equity as needed for other purposes. During the first decade of this century, one in five home owners aged 45-64 years increased their mortgage debt <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0013/2191/AHURI_Final_Report_No217_Housing-equity-withdrawal-uses,-risks,-and-barriers-to-alternative-mechanisms-in-later-life.pdf">even though they did not move house</a>. </p>
<p>Third, older home owners appear to be taking on bigger mortgages or delaying paying them off in the knowledge that they can work longer than their parents did, or draw down their superannuation account balances.</p>
<h2>Super could be changing our behaviour</h2>
<p>For mortgage holders aged 55-64 years, there is evidence to suggest that larger debts <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0008/12023/AHURI_Final_Report_No275_A-new-look-at-the-channels-from-housing-to-employment-decisions.pdf">prolong working lives</a>. </p>
<p>In 2017 around <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6238.0">29% </a> of lump sum superannuation withdrawals were used to pay down mortgages or purchase new homes or pay for home improvements, up from <a href="https://www.pc.gov.au/research/completed/superannuation-post-retirement/super-post-retirement-volume1.pdf">25%</a> four years earlier.</p>
<p>In the Netherlands, where a mandatory occupational pension scheme along the lines of Australia’s super scheme has been in place for much longer, <a href="https://opendata.cbs.nl/statline/#/CBS/nl/dataset/81702NED/table?ts=1539244705047">over one-half</a> of home owners aged 65 and over are still paying off mortgages.</p>
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<a href="https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=184&fit=crop&dpr=1 600w, https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=184&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=184&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=231&fit=crop&dpr=1 754w, https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=231&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/278784/original/file-20190611-52780-kg72kd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=231&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The base is the total number of uses of lump sums rather than the number of people taking lump sums.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6238.0">ABS 6238.0 Retirement and Retirement Intentions</a></span>
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<h2>The implications are huge</h2>
<p>Internationally, studies have found that indebtedness <a href="https://www.sciencedirect.com/science/article/abs/pii/S0277953615001203?via%3Dihub">adds to psychological distress</a>. The impacts on wellbeing are more profound for older debtors, without the ability to recover from financial shocks.</p>
<p>Debt-free home ownership in old age used to be known as the <a href="https://www.ceda.com.au/CEDA/media/ResearchCatalogueDocuments/PDFs/27922-CEDATheSuperChallengeofRetirementIncomePolicySept2015FINAL.pdf">fourth pillar of the retirement incomes system</a> because of its role in <a href="https://link.springer.com/article/10.1007/s10901-010-9187-4">reducing poverty in old age</a>. It allowed the Australian government to set the <a href="https://melbourneinstitute.unimelb.edu.au/assets/documents/hilda-bibliography/conference-papers-lectures/2013/Haffner-Ong-Wood-ENHR2013-Paper.pdf">age pension at relatively low levels</a>.</p>
<p>Growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0022/2857/AHURI_Positioning_Paper_No153_Assets,-debt-and-the-drawdown-of-housing-equity-by-an-ageing-population.pdf">boost the age pension</a>.</p>
<p>Mortgage debt burdens late in working life will also expose home owners to unwelcome risks, as health or employment shocks can ruin plans to pay off their mortgages. </p>
<p>During the first decade of this century, around <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0007/2104/AHURI_Final_Report_No187_Sustaining_home_ownership_in_the_21st_century_emerging_policy_concerns.pdf">half a million</a> Australians aged 50 years and over lost their homes.</p>
<h2>Taxpayers will be under pressure to help</h2>
<p>Those losing home ownership are often forced to rely <a href="https://journals.sagepub.com/doi/abs/10.1177/0042098014550955">on rental housing assistance</a>. Moreover, as older tenants they are <a href="https://journals.sagepub.com/doi/abs/10.1177/0042098014550955">unlikely to ever leave housing assistance</a>. This will put pressure on the government to boost spending on housing assistance, which is likely to further boost <a href="https://theconversation.com/when-falling-home-ownership-and-ageing-baby-boomers-collide-102846">demand for housing assistance</a>.</p>
<p>Super and government housing assistance could become the safety nets that allow retirees to escape their mortgages.</p>
<p>It wasn’t the intended purpose of superannuation, and wasn’t the intended purpose of housing assistance. It is a development that ought to be front and centre of the <a href="https://www.afr.com/news/policy/tax/retirement-incomes-face-review-20190524-p51qsi">inquiry into the retirement incomes system</a> announced by Treasurer Josh Frydenberg.</p>
<p>It is a change we’ll have to come to grips with.</p>
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Read more:
<a href="https://theconversation.com/home-ownership-foundations-are-being-shaken-and-the-impacts-will-be-felt-far-and-wide-91664">Home ownership foundations are being shaken, and the impacts will be felt far and wide</a>
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<img src="https://counter.theconversation.com/content/115134/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Ong ViforJ receives funding from the Australian Housing Urban and Research Institute and the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Gavin Wood receives funding from the Australian Housing Urban and Research Institute and the Australian Research Council. </span></em></p>47% of Australians aged 55-64 have mortgage debt, up from 14% in 1990.Rachel Ong ViforJ, ARC Future Fellow & Professor of Economics, Curtin UniversityGavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1040512018-10-31T10:40:16Z2018-10-31T10:40:16ZThinking about borrowing against your home to send your kids to college? Think again<figure><img src="https://images.theconversation.com/files/243698/original/file-20181102-83651-91p4h4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Researchers found that families who send their children off to college face an increased risk for foreclosure.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/parents-helping-teenage-son-pack-college-184855727?src=ubyjeY5Qg3MdUQ5mxhIvQQ-1-1">Monkey Business Images/www.shutterstock.com</a></span></figcaption></figure><p>When the time comes to send their children off to college, many parents in the U.S. take out loans, draw from savings and earnings and – as some financial advisors recommend – borrow against their homes.</p>
<p>In a <a href="https://link.springer.com/article/10.1007%2Fs13524-018-0702-7">study</a> we published earlier this year, we found a hidden danger that parents face when they borrow heavily to pay for their children’s college education.</p>
<p>We are sociologists who specialize in <a href="https://scholar.google.com/citations?user=d816HY4AAAAJ&hl=en&oi=ao">housing and the Great Recession</a> and <a href="https://scholar.google.com/citations?user=mdERDMIAAAAJ&hl=en">structural inequalities</a> in access to education.</p>
<p>For our study, we leveraged foreclosure data and tax return data to show that, between 2006 and 2011, a 1 percent increase in college attendance among 19-year-olds was followed consistently by about 19,000 additional foreclosures the following year nationwide.</p>
<h2>Odds of foreclosure double</h2>
<p>We also used three independent data sets tracking individual households over time to confirm the connection between college attendance and foreclosure. We found that the odds of foreclosure are twice as high among homeowners with a child in college, even after we account for their income, mortgage interest rate, the presence of other children, race, householders’ education and marital status, and region. </p>
<p>These foreclosures are not explained by the sub-prime lending that led to the Great Recession and the unemployment that followed, according to our <a href="https://link.springer.com/article/10.1007%2Fs13524-018-0702-7">research</a>.</p>
<p>Our <a href="https://link.springer.com/article/10.1007%2Fs13524-018-0702-7">analysis</a> also accounts for other concurrent changes in economic, demographic and housing conditions, as well as state-level changes in tuition and student debt accumulation. </p>
<h2>Tuition rises</h2>
<p>The <a href="https://www.taylorfrancis.com/books/e/9780429968372/chapters/10.4324%2F9780429499821-10">value of a college education</a> is well-established. Compared to workers with a high school degree or less, college degree holders receive a substantial wage premium that pays <a href="https://www.mitpressjournals.org/doi/10.1162/rest.90.2.300">lifelong dividends</a> in health, security and wealth accumulation. </p>
<p>This may explain why, between 1980 and 2014, college enrollment among high school graduates has increased 16.3 percentage points even as average inflation-adjusted tuition for two- and four-year institutions <a href="https://nces.ed.gov/pubs2016/2016014.pdf">more than doubled</a>.</p>
<p>The sharp rise in tuition coincided with a well-documented increase in student debt and an effort by many institutions of higher learning to institute a sliding scale for tuition, based on need. This scale uses an algorithmically determined <a href="https://www.nytimes.com/interactive/2018/06/05/opinion/columnists/what-college-really-costs.html">net tuition price</a>, which is adjusted by grants and other financial aid.</p>
<p>Even with these offsets, families often still confront a large <a href="https://studentaid.ed.gov/sa/fafsa/next-steps/how-calculated#efc">“expected family contribution</a>.”</p>
<p>Interestingly, we find that the statistical relationship between college attendance and foreclosures is consistent across income levels. This suggests that, all else being equal, sliding scale tuition and need-based offsets may not be enough to make college affordable for poor, middle-class and even affluent households.</p>
<p>For many families, investments in education and homeownership – pillars of the American dream – require taking on tremendous amounts of debt with the promise of improved economic status. In an era of <a href="https://www.nytimes.com/interactive/2017/08/07/opinion/leonhardt-income-inequality.html">widening inequality</a>, <a href="https://www.brookings.edu/research/the-evolution-of-household-income-volatility-3/">increasing income instability</a> and <a href="https://www.nytimes.com/2017/05/22/us/politics/trump-budget-cuts.html">retracting social welfare policy</a>, this promise has become far less secure. A question policymakers and college financial offices ought to ask is whether it’s a good idea for families to basically put up their homes to pay for their children’s college education.</p>
<p>This question is particularly relevant given the decades-long trend of increasing tuition.</p>
<p>Some have suggested that college spending must be <a href="https://www.nytimes.com/2018/01/09/opinion/trustees-tuition-lazy-rivers.html">reined in</a>. Others argue that college financial aid must become <a href="https://www.nytimes.com/roomfordebate/2016/01/20/should-college-be-free">more generous</a>. Both approaches would help reduce the pressure for families to borrow against their homes to send their children to college.</p>
<p><a href="https://whyy.org/articles/tuition-free-community-colleges-public-universities-proposed-in-pa/">Proposals for free tuition</a> for low- and moderate-income households are also an important part of the solution. The need for such efforts is even more evident in light of the fact that <a href="https://www.cbpp.org/research/state-budget-and-tax/a-lost-decade-in-higher-education-funding">many states have increased tuition</a> since the Great Recession. Further, state funds for higher education are still below pre-recession levels in <a href="https://www.cbpp.org/research/state-budget-and-tax/a-lost-decade-in-higher-education-funding">all but five states</a> – Indiana, Montana, Nebraska, North Dakota and Wyoming.</p>
<h2>What can be done</h2>
<p>The fact that so many foreclosures are connected to college attendance also shines light on why the federal policy response to foreclosures was <a href="https://www.tandfonline.com/doi/abs/10.1080/10511482.2012.749933">relatively ineffective</a>. Foreclosure prevention needs to look at more than mortgage terms. Rather, foreclosure prevention must also deal with a broader range of financial burdens that cause families to overextend themselves financially. </p>
<p>Anti-predatory lending policies, which have been <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9906.2011.00556.x">shown to rein in unscrupulous lenders</a>, should also be expanded and strengthened. And mortgage lender reporting requirements, <a href="https://www.npr.org/sections/thetwo-way/2018/05/22/613390275/congress-to-undo-part-of-dodd-frank-easing-rules-for-mid-sized-smaller-banks">under assault</a> from a business-first and consumer-last administration and Republican Congress, must continue. </p>
<p>As novel as our findings may be, they might not fully reflect the consequences of rising college costs. For instance, the <a href="https://ticas.org/content/pub/student-debt-and-class-2017">growing amounts of student debt</a> may pose a threat to housing stability for college graduates in the future.</p>
<p>Indeed, research has shown that higher rates of student loan debt are associated with <a href="http://libertystreeteconomics.newyorkfed.org/2017/04/diplomas-to-doorsteps-education-student-debt-and-homeownership.html">lower rates of homeownership</a>. In essence, what this could mean is one generation will be barely holding onto their homes to put their kids through college, while their kids may find themselves so saddled with student loan debt that they are ultimately unable to buy a home.</p><img src="https://counter.theconversation.com/content/104051/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jacob William Faber receives funding from The Russell Sage Foundation and the William T. Grant Foundation. </span></em></p><p class="fine-print"><em><span>Our work on this project was supported by the Russell Sage Foundation (Award 83-14-09).</span></em></p>The odds of foreclosure double for families who send their kids off to college, according to two researchers who say their findings show a need for new ways for Americans pay for higher education.Jacob William Faber, Assistant Professor, New York UniversityPeter Rich, Assistant Professor, Cornell UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/952862018-05-21T19:48:22Z2018-05-21T19:48:22ZHousing costs are actually the same as in 1993, but renters still struggle<p>Even though house prices have risen substantially over recent decades, housing costs as a share of income have barely shifted in over 20 years. Costs relative to disposable income for housing are largely unchanged, at 17% since 1993, although there has been some increase since 2000.</p>
<p>There is no agreed measure for defining housing affordability, but just looking at house prices can be deceptive. Australian households are roughly equally split between purchasing, renting or owning their house outright. </p>
<p>There is no doubt that house prices increased substantially over recent decades. According to <a href="https://www.corelogic.com.au/research/rpdata-corelogic-home-value-index">CoreLogic</a> over the past 20 years the median house price in Australia increased from A$140,000 in December 1997 to A$540,000 by December 2017 – an annual increase of 7%. Relative to disposable income this represents a 68% increase over the 20-year period.</p>
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<a href="https://theconversation.com/five-changes-that-could-make-make-housing-better-for-generation-rent-95386">Five changes that could make make housing better for generation rent</a>
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<p>Australian households are roughly equally split between purchasing, renting or owning their house outright. Highly inflated house prices are more concerning to people wishing to move from renting to purchasing a house (mostly potential first home buyers). </p>
<p>Housing affordability looks very different when we look at actual housing costs relative to income, rather than just house prices. Housing costs increased substantially between 1984 and 1993. </p>
<p>This was a combination of weak income growth and strong increases in housing costs, particularly mortgages with interest rates increasing sharply over this period. Since peaking in 1993 costs remained relatively stable with rents increasing modestly over the past 10 years, while mortgage costs declined. </p>
<p>Overall, actual housing costs relative to income have remained stable since 1993 at around 16% of disposable income. </p>
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<p>We split households into five equal groups from lowest 20% of disposable income up to highest 20%, after adjusting for type of family and household size. Clearly, low-income households spend a lot more on housing relative to their income than higher-income households. The share of housing costs for the lowest income quintile has increased in recent years but is not substantially different from longer term averages. </p>
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<p>All other income groups have increased their share of spending relative to income since 1984. Since 1993 the changes have been mixed with the lowest income households and highest income households both spending less as a share of income, while the middle income categories have increased their spending, albeit modestly.</p>
<p>Housing was much more affordable in 1984 with average housing costs at just 11.3% of disposable income. </p>
<p>A number of important changes have occurred over the past 25 years. Interest rates are much lower, living standards have increased substantially for low, middle and high income families and savings rates have also increased – implying that housing costs are increasingly a larger share of expenditure.</p>
<p>Another common measure of housing affordability is housing stress. We use the “30/40” stress rule – a household paying more than 30% of their disposable income on housing costs and also in the bottom 40% of the income distribution. </p>
<p>Using this housing stress measure, we see a significant increase in renter stress, firstly between 1984 and 1993 and then from 2007. Mortgage stress is largely unchanged since 1988 following an increase between 1984 and 1988.</p>
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<p>Housing stress rates are similar for major states. The highest rate is in Queensland with 13.5% of households in stress whereas the combined ACT and NT region has the lowest stress rate at 8.1%, thanks to relatively high incomes. The NSW rate is lower than both Victoria and Queensland. </p>
<p>Home ownership rates in Australia have slowly declined since 1984 from around 72% to around 68% by 2015-16. Ownership rates of households headed by people aged under 35 dropped from 50% in the 1980s to around 35% in 2015-16. Households headed by people aged 35 to 49 have experienced a similar percentage point decline but from a higher base. </p>
<p>The downward trend in ownership rates for younger households has been ongoing since 1988. Surprisingly, the house price boom between 1999 and 2005 in Australia does not appear to have made a significant difference to pre-existing trends. </p>
<p>However, home ownership trends are complex, and are likely driven by a range of factors such as interest rates, higher rents in the 1980s, broader societal changes such as people marrying and having children later in life and a higher divorce rates. Another possibility is a shift away from home ownership, with younger people preferring the flexibility that renting offers. </p>
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<p>Overall, housing costs in Australia have been relatively stable as a share of disposable income since the early 1990s. This average does mask problems for low-income renters who are paying an increasing share of their income on housing costs, and rent stress levels have also increased over the long term. </p>
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Read more:
<a href="https://theconversation.com/housing-affordability-stress-affects-one-in-nine-households-but-which-ones-are-really-struggling-96103">Housing affordability stress affects one in nine households, but which ones are really struggling?</a>
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<p>Changed economic circumstances provide risks for housing affordability. Were interest rates or unemployment to increase sharply there would be risks to households and flow on effects to the broader economy. </p>
<p>House prices have indeed increased sharply since the late 1990s, well above incomes or inflation. This poses a problem for those wishing to move from the rental market to owning a home as higher house prices imply larger deposits. </p>
<p>While elevated house prices are a concern, the more pressing social problem for Australia remains the lack of affordable rental housing for lower-income families that is close to jobs and services in our capital cities. This has been an ongoing problem in Australia for a number of decades. An ageing population with potentially lower home ownership rates will add to this problem in future years.</p><img src="https://counter.theconversation.com/content/95286/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Phillips does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Even though house prices have risen substantially over recent decades, housing affordability for those with mortgages or own their houses outright hasn’t worsenedBen Phillips, Associate Professor, Centre for Social Research and Methods, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/879322017-11-29T22:41:37Z2017-11-29T22:41:37ZNo help for would-be homeowners in Canada’s new housing strategy<figure><img src="https://images.theconversation.com/files/196788/original/file-20171128-28852-1hro7gh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A real estate sold sign hangs in front of a west-end Toronto property. Canada's newly announced housing strategy contains scant measures to help first-time buyers in pricey markets.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Graeme Roy</span></span></figcaption></figure><p>Canada’s federal government just released its <a href="https://www.placetocallhome.ca/pdfs/Canada-National-Housing-Strategy.pdf">National Housing Strategy.</a> It is the first fully articulated strategy for Canada, containing several initiatives designed to make housing more affordable for the most vulnerable in our country. </p>
<p>But what’s in the policy for Canadians trying to buy their first homes in high-priced markets like Toronto and Vancouver? Very little.</p>
<p>Ottawa has generally been removed from the debate on how to make home ownership more affordable in pricey markets. The provinces and local governments have control over many factors that affect affordability. But it’s wrong to assume that there’s no federal role in ensuring affordable and responsible home ownership. </p>
<p>The federal government can affect the ability to buy a home through mortgage insurance, financial regulation, interest rates and tax policy. </p>
<p><a href="https://www.theglobeandmail.com/real-estate/four-major-changes-to-canadas-housing-rules/article32223470/">Actions by the federal government</a> in relation to home ownership in recent years have been somewhat confused. Rules for lending on housing have been gradually tightened every few months for the past few years. At the same time, <a href="https://www.ratehub.ca/first-time-home-buyer-tax-credit">tax credits for first-time buyers</a> have been introduced to encourage home ownership. It’s not clear whether the government wants to encourage or discourage home ownership.</p>
<h2>Social housing important</h2>
<p>A recent report <a href="http://macdonaldlaurier.ca/files/pdf/MLI_FederalHousing_webF.pdf">published by the MacDonald Laurier Institute</a> makes several recommendations for supporting affordable home ownership.</p>
<p>First, there needs to be a recognition that affordable housing and housing affordability are different and require different policy responses. </p>
<p>Social and affordable rental housing built under various government programs represents approximately six per cent of the housing market. That leaves a large segment of the population that must find a way to afford the housing provided by the private market. Some attention to this segment of the housing continuum is warranted in a full National Housing Strategy. </p>
<p>This is not to diminish the importance of social housing or the potential for new thinking on how the federal government can more effectively support those who require social housing. The announcement of a <a href="https://www.theglobeandmail.com/opinion/a-portable-housing-benefit-could-ease-our-homeless-crisis/article34341148//">new portable housing benefit</a> that helps people living in unstable housing situations, for instance, is a major step forward.</p>
<p>But Ottawa should also put any new or pending changes to mortgage and financing rules on hold, including the January 2018 change <a href="http://www.cbc.ca/news/business/osfi-mortgage-rules-1.4358048">requiring stress-testing of uninsured mortgage loans</a> at approximately two per cent above the rate negotiated by the borrower.</p>
<h2>Mortgage arrears practically non-existent</h2>
<p>Mortgage underwriting rules have been altered several times since 2009. The market has experienced considerable policy volatility. The cumulative impact of successive changes is still playing itself out. These tweaks have continued despite the fact that mortgage arrears in Canada have been <a href="https://www.cba.ca/mortgages-in-arrears">well under one per cent</a> —and dropping — for more than two decades.</p>
<p>There is room to rethink how the mortgage insurance program operates, including investigating alternative models of insurance that are less costly to borrowers.</p>
<p>The Canada Mortgage and Housing Corp. announced in June 2017 that <a href="https://www.google.ca/search?q=cmhc+%244+billion+dividend&rlz=1C1CHBF_enCA689CA689&oq=cmhc+%244+billion+dividend&aqs=chrome..69i57.8673j0j4&sourceid=chrome&ie=UTF-8">it would pay the federal government a special $4 billion dividend</a> over the next two years beyond what the Crown housing agency already sends Ottawa from its net income. </p>
<p>Why is this significant? The money comes largely from accumulated mortgage insurance fees collected from first-time home buyers. A surplus of this size indicates that mortgage insurance fees, last hiked in March 2017, are higher than required. </p>
<p>There are different methods of charging for mortgage insurance that would result in lower overall fees for borrowers —for example, those that involve a monthly payment until the loan-to-value ratio for the house falls below a designated level, instead of the large upfront fee added to the mortgage loan used in Canada.</p>
<h2>Room for creativity</h2>
<p>Finally, there’s room to consolidate and augment existing pro-home ownership tax policies. The Liberal party’s 2015 election platform committed to a comprehensive review of federal tax expenditures comprised of credits, deductions and other special preferences. This exercise was supposed to ensure that the federal tax code was efficient, simple and fair. </p>
<p>The federal tax code presently includes tax expenditures related to home ownership that total roughly $5 billion in annual foregone revenue — a substantial amount. </p>
<p>Some of these tax expenditures have gone unchanged for decades or have been enhanced without much thought towards the broader federal housing policy framework. There’s room for more creative and ambitious thinking about how the federal tax system can support affordable and responsible home ownership.</p>
<p>One option would be a means-tested tax credit to defray the costs associated with a home purchase. Another option would be to allow prospective home owners to contribute to a Tax Free Savings Account with means-tested matching contributions from the government for the purpose of saving up for a larger down payment.</p>
<p>This idea is along the lines of the current Registered Education Savings Plans or Registered Disability Savings Plans and could support equity-accumulation and reduce the share of insured mortgages.</p>
<p>Now that the government has announced a comprehensive plan for assisting the affordable housing segment of the housing market, it’s time to turn its attention to helping people buy homes.</p><img src="https://counter.theconversation.com/content/87932/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jane Londerville received funding from MacDonald Laurier Institute; she is a Munk Senior Fellow with MLI . </span></em></p>Canada’s National Housing Strategy leaves a large segment of the population that must find a way to afford housing in the private market. More initiatives are needed to help first-time home buyers.Jane Londerville, Associate Professor of Real Estate, University of GuelphLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/855912017-10-12T19:12:49Z2017-10-12T19:12:49ZVital Signs: the spooky mortgage risk signs our bankers are ignoring<figure><img src="https://images.theconversation.com/files/189912/original/file-20171012-9782-l9frs1.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There are signs our frothy housing market, combined with rising interest rates, could have serious consequences for our economy.</span> <span class="attribution"><span class="source">Nick Vidal-Hall/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: the big banks front a parliamentary review but remain blinkered on the risks of the many interest-only loans they’ve funded.</em></p>
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<p>I’m not normally a fan of parliament hauling private sector executives before them and asking thorny questions. But when the Australian House of Representatives did so <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0002%22">this week with the big banks</a> it was both useful and instructive.</p>
<p>And, to be perfectly frank, terrifying.</p>
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Read more:
<a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">Four ways an Australian housing bubble could burst</a>
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<p>Let’s start with Westpac CEO Brian Hartzer. First, he confirmed the little-known but startling fact that <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=COMMITTEES;id=committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0001;query=Id%3A%22committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0002%22">half</a> of his A$400 billion home loan book consists of interest-only mortgages.</p>
<p>Yep, half. Of A$400 billion. At one bank. Oh, and ANZ, CBA and NAB are all nearly at 40% interest-only.</p>
<p>Hartzer went on to make the banal statement: “we don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so.”</p>
<p>So did it make sense for all those American mortgage lenders to lend to people on adjustable rates, teaser rates, low-doc loans, no-doc loans etc. before the global financial crisis?</p>
<p>Of course not. The point is that banks are not some benevolent, unitary actor taking care of their own money. There are top managers like Harzter acting on behalf of shareholders. Those top managers delegate authority to lower-level managers, who are given incentives to write lots of mortgages. And, as we know, the incentives of those who make the loans are not necessarily aligned with those of the shareholders. Those folks may well want to make loans to people who can’t pay them back as long as they get a big payday in the short term.</p>
<p>ANZ CEO Shayne Elliot repeated Hartzer’s mantra, saying: “It’s not in our interest to lend money to people who can’t afford to repay.” Recall, this is the man who <a href="http://www.abc.net.au/4corners/betting-on-the-house/8816724">on ABC’s Four Corners</a> said that home loans weren’t risky because they were all uncorrelated risks (the chances that one loan defaults does not affect the chances of others defaulting). That is a comment that is either staggeringly stupid or completely disingenuous.</p>
<p>Messers Harzter and Elliot must take us all for suckers. They have made a huge amount of interest-only loans, at historically low interest rates, to buyers in a frothy housing market, who spend a large chunk of their income on interest payments. This certainly looks troubling. It may not be US sub-prime, but it could be ugly. Very ugly.</p>
<p>To put it in context, there appears to be in the neighbourhood of A$1 trillion of interest-only loans on the books of Australian banks. I say “appears to be” because reporting requirements are so lax it’s hard to know for sure, except when CEOs cough up the ball, like this week.</p>
<p>The big lesson of the US mortgage meltdown is that the risks on these mortgages are all correlated. If a few people aren’t paying back an interest-only loan, that is a fair predictor that others won’t pay back their loans either. Yet it seems Australian banks are a decade behind the learning curve.</p>
<p>The Reserve Bank cautions that <a href="https://www.rba.gov.au/publications/fsr/2017/apr/pdf/financial-stability-review-2017-04.pdf">one-third of borrowers</a> don’t have a month’s repayment buffer. And where are interest rates going to go from here? Up. It is just a question of when. And when that does happen - or when the interest-only period on loans (typically five years) rolls off and principal payments start having to be made - watch out.</p>
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Read more:
<a href="https://theconversation.com/banks-shouldnt-underestimate-the-risk-of-concentration-in-the-housing-market-82886">Banks shouldn't underestimate the risk of concentration in the housing market</a>
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<p>We should all remember that the proximate cause of the US mortgage meltdown was borrowers with five-year adjustable-rate mortgages (ARMs) that had huge step-ups in repayments and needed to be refinanced to be serviceable. When the market couldn’t bear that refinancing, defaults went up. Then the collapse of US investment bank Bear Stearns, then <a href="http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp">Lehman</a>, then Armageddon.</p>
<p>Australia’s large proportion of five-year interest-only loans – turbocharged by an out-of-control negative-gearing regime – looks spookily similar.</p>
<p>It’s one thing for borrowers to do silly things. When it becomes dangerous is when lenders not only facilitate that stupidity, but encourage it. That seems to be what has happened in Australia.</p>
<p>And APRA’s “crackdown” and the Reserve Bank’s warning may be far too little, way too late.</p>
<p>We might stumble though this. I hope we do. But if so, it will be because of dumb luck, not good institutional and regulatory design. And definitely not because of good corporate governance.</p>
<p>Whatever happens, we should learn those lessons.</p><img src="https://counter.theconversation.com/content/85591/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Fully half of Westpac’s loan book consists of interest-only loans, so why are the banks not more concerned about what could happen next?Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/828862017-08-23T06:37:24Z2017-08-23T06:37:24ZBanks shouldn’t underestimate the risk of concentration in the housing market<p>The view of Australian banks on the risk that mortgage stress poses to our economy and the banks’ own viability is worrying. Shayne Elliott, CEO of ANZ Bank commented in this <a href="http://www.abc.net.au/4corners/stories/2017/08/21/4719901.htm">week’s Four Corners report</a>:</p>
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<p>The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of relatively small loans across ah across the country.</p>
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<p>This view is in contradiction to research from the United States which finds housing markets <a href="https://academic.oup.com/rfs/article-abstract/28/3/913/1576961/Can-Housing-Risk-Be-Diversified-A-Cautionary-Tale">there are less diversified than previously thought</a>. This means any house price shocks will likely occur simultaneously across the country, causing large cumulative losses to borrowers and banks via mortgage defaults. Australian housing markets are likely to be even more concentrated than in the US because of the population size of Sydney and Melbourne.</p>
<p>Banking regulator the Australian Prudential Regulation Authority (APRA) <a href="http://www.apra.gov.au/MediaReleases/Pages/17_23.aspx">has already issued guidelines</a> to the banks on tracking exposure to mortgages and limiting the growth of loans to investors, in particular for interest-only loans. An <a href="http://retailbankingremreview.com.au/">independent review by Stephen Sedgewick</a> on behalf of the industry also recommended banks stop paying mortgage brokers based on the volume of loans they secure, in an effort to reduce risks. But these steps might not be enough to ensure security.</p>
<h2>Australian bank exposure to mortgage risk</h2>
<p>Bank losses during the global financial crisis were in large parts driven by borrowers not being able to make their mortgage repayments. After receiving a loan, borrowers may experience income shocks like loss of jobs or demotion and expense shocks like higher petrol prices or interest rates, that affect their ability to service their mortgages.</p>
<p>Australian mortgage contracts are risky for borrowers in international terms. Unlike other countries, Australian banks offer to lend only up to five years at a fixed rate and the majority of loans are at a variable rate. </p>
<p>This leaves Australian borrowers exposed to interest rate increases. In the past few years, interest rates were lowered as Reserve Bank of Australia economists targeted low inflation rates.</p>
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<p>Interest rates are now close to zero, limiting the ability of the RBA to stimulate economic growth. There’s the possibility the RBA could raise interest rates, causing shocks to mortgage borrowers. My <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=659451">research</a> shows this shock could increase bank losses substantially.</p>
<p>At the moment <a href="http://www.abs.gov.au/ausstats/abs@.nsf/exnote/6401.0">23% of consumer expenses</a> are housing related and this number is likely higher for mortgage borrowers and could be growing. Interest rate increases, in combination with <a href="https://theconversation.com/home-ownership-falling-debts-rising-its-looking-grim-for-the-under-40s-81619">the current high debt levels</a>, are therefore likely to increase inflation and trigger further interest increases. </p>
<h2>Dealing with the risk of mortgage stress</h2>
<p>Current bank portfolios are not well diversified, if <a href="https://theconversation.com/australian-banks-are-too-exposed-to-mortgages-but-what-if-the-world-was-flat-31000">60% of bank assets are in mortgages</a>. Other loan classes such as commercial real estate loans and small to medium enterprise loans are also often property-backed. </p>
<p>Bank lending standards need to be more consistent to avoid borrowers shopping around for the lender that offers them the highest loan amount. Lending standards should also consider the concentration of housing income and expenses in a borrower’s portfolio.</p>
<p>Banks should promote fixed rate mortgages. This type of mortgage transfers interest rate risk from borrowers to the banks, that are better placed to manage this risk. This may come at an additional cost but should be small compared to the cost borne by consumers <a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">should the housing bubble ever burst</a>. </p>
<p>There also needs to be more scrutiny of the use of offset accounts and redraw facilities, being used as an offset for outstanding loans. Borrowers often use these funds to purchase additional properties and they may not be available in the case of mortgage default. Instead of promoting offset accounts it may be better to give borrowers a prepayment on their mortgage, but not an option to redraw. Should consumers want to draw down on the equity in their homes, they could then apply for a second mortgage. </p>
<p>Mortgage brokers should act as independent advisers, a tool for consumer information and bank competition, as smaller lenders in particular rely on mortgage brokers. The Sedgwick report suggested the loan to value ratio of mortgages should be considered when paying mortgage brokers. This would mean that loans with high loan-to-value ratios (where the borrower is more likely to default) would earn a lower fee.</p>
<p>The Sedgwick banking review has been a step in the right direction, but the focus should be on banks rather than mortgage brokers, as it’s ultimately the bank that is in a contract with the consumer. </p>
<p>Some of this may require a fundamental value change. It’s not likely the Australian appetite for property will change but this means we need to hedge our bets against any risks by improving diversification and the way banks finance mortgages.</p><img src="https://counter.theconversation.com/content/82886/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Scheule does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s not likely the Australian appetite for property will change but this means we need to hedge our bets against any risks by improving diversification and the way banks finance mortgages.Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/795782017-06-28T20:11:07Z2017-06-28T20:11:07ZAustralians are working longer so they can pay off their mortgage debt<p>Rising mortgage debt is affecting everything from employment to spending as Australians approach retirement, <a href="https://www.ahuri.edu.au/research/final-reports/285">our study finds.</a> Higher levels of housing debt among pre-retirees are linked to them working for longer. </p>
<p>For a home owner aged 45-64 years, we found the chances of being employed are around 40% higher for every additional A$100,000 in mortgage debt owed against the family home. </p>
<p>There’s also a link between house price changes and household spending. For every A$100,000 increase in the value of a person’s house, annual household spending of home owners increased by around A$1,500. These home owners are willing to increase their spending because they’re able to borrow more against their home to finance it.</p>
<h2>Long-run trends in mortgage debt</h2>
<p>Australians are <a href="http://www.abs.gov.au/ausstats/abs@.nsf/dossbytitle/F0CDB39ECC092711CA256BD00026C3D5?OpenDocument">paying down their mortgages</a> later in life. The percentage of home owners aged 25 years or over who are carrying a mortgage debt climbed from 42% to 56% between 1990 and 2013.</p>
<p>Mortgage debt burdens among pre-retirees have soared. For home owners aged 45-54 years, the incidence of mortgage debt has nearly doubled from 36% to 71%. Among those aged 55-64 years, this incidence has more than tripled from 14% to 44%.</p>
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<p>These trends reflect at least two things. Higher housing cost burdens have resulted in a <a href="http://theconversation.com/the-facts-on-australian-housing-affordability-42881">decline in home ownership rates among young people</a>. Those able to access home ownership are doing so later in life and by taking on higher levels of debt relative to their incomes. </p>
<p>Flexible mortgage products also now allow home owners to <a href="http://theconversation.com/your-home-as-an-atm-home-equity-a-risky-welfare-tool-22000">unlock wealth stored in the family home whenever required</a>, and not just in their retirement years.</p>
<h2>Higher mortgage debts, longer working lives</h2>
<p>Australians are working longer because they are paying down their mortgages later in life.</p>
<p>Our modelling, based on 2001-2010 Household, Income and Labour Dynamics in Australia (HILDA) Survey data, shows that pre-retirees aged 55-64 are 18% more likely to continue working for every A$100,000 increase in their mortgage debt. </p>
<p>On the one hand, unexpected increases in housing prices could have caused buyers considering home ownership to borrow more to buy a house, and encouraged home owners to spend more by withdrawing the equity from their homes. These mortgagors then have to extend their working lives to meet higher mortgage repayments.</p>
<p>On the other hand, longer life expectancy may have encouraged many Australians to plan longer working lives. Carrying higher levels of mortgage debt later in life could be a financial tactic to finance their spending over a longer lifespan. </p>
<h2>Borrowing more, spending more?</h2>
<p>Our analysis found some differences between subgroups of home owners and between periods preceding and following the global financial crisis.</p>
<p>Before the global financial crisis highly indebted home buyers were more prepared to use their mortgages in order to bridge the gap between spending plans and income. After the crisis, home buyers with large mortgages were less willing to use their mortgages in this way. </p>
<p>In contrast, the spending plans of indebted households who both own their home and a second investment property seem more sensitive to house price movements since the global financial crisis. Property investors with mortgage debt increased their average yearly spending after the crisis from A$1,700 to over A$2,800 for every A$100,000 increase in their housing wealth. </p>
<p>On the other hand, for home owners with no investment properties, average yearly spending tightened from A$1,700 to A$1,500 for every A$100,000 increase in their housing wealth. This suggests investors with debt are not so risk-averse as other home owners.</p>
<h2>Housing, productivity and the economy</h2>
<p>Mortgage debts have important economy-wide effects through interactions with labour markets and consumer spending. </p>
<p>Ageing is often associated with lower rates of labour force participation and declining physical and mental health, which <a href="http://www.pc.gov.au/inquiries/completed/ageing/report/ageing.pdf">can result in reduced productivity growth</a>. If people are extending their working lives to repay higher mortgage debt, this could mitigate some of the productivity consequences of population ageing, albeit at the expense of greater exposure to debt in later life. </p>
<p>When real house values are rising, home owners and property investors are able to borrow more against their home to finance their spending. In the short run this can help offset the effect of stagnant wages (on their spending) and thereby sustain growth momentum in the economy. </p>
<p>But if wages fail to pick up, these higher levels of debt can be a drag on growth. High levels of indebtedness also increase exposure to house price and interest rate risk, and pose a threat to macroeconomic stability.</p>
<p>Our research makes a compelling case for considering housing differently, as essential economic infrastructure. Housing needs to be re-positioned from the periphery to a central place within national economic policy debates. This could be crucial to an understanding of how our housing system can promote rather than curb economic growth in Australia.</p><img src="https://counter.theconversation.com/content/79578/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This article draws from research funded by the Australian Housing and Urban Research Institute (AHURI) under grant number 81070.
Rachel Ong is Deputy Director of the Bankwest Curtin Economics Centre, an independent economic and social research organisation located within Curtin Business School at Curtin University. The centre was established in 2012 with support from Bankwest (a division of Commonwealth Bank of Australia) and Curtin University. The views in this article are those of the authors and do not represent the views of Curtin University and/or Bankwest or any of their affiliates.</span></em></p><p class="fine-print"><em><span>This article draws from research funded by the Australian Housing and Urban Research Institute (AHURI) under grant number 81070.. </span></em></p><p class="fine-print"><em><span>This article draws from research funded by the Australian Housing and Urban Research Institute (AHURI) under grant number 81070. </span></em></p>Research finds higher levels of housing debt among pre-retirees are linked to them working for longer.Rachel Ong ViforJ, Deputy Director, Bankwest Curtin Economics Centre, Curtin UniversityGavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT UniversityKadir Atalay, Senior Lecturer in Economics, University of SydneyMelek Cigdem-Bayram, Research Fellow, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/800682017-06-27T09:27:37Z2017-06-27T09:27:37ZHome ownership remains strong in Australia but it masks other problems: Census data<p>The great Australia dream of owning your own home is still alive despite the various problems plaguing housing affordability, new Census data shows. Even though the overall home ownership trend remains strong, it’s masking other issues.</p>
<p>The latest 2016 Census data assesses what the national home ownership and rental rates are and how these vary location. It also gives us a picture of mortgage and rental costs.</p>
<p>Comparing home ownership rates since the 2011 Census, there’s a slow but steady decline in home ownership rates overall - down by 2.7% from 68.1% of all Australian households in 2006, to 65.4% in 2016. However, 2.7% of households did not state their housing tenure in the 2016 Census. This accounts for some of the variation in reported rates of home ownership decline. </p>
<p>This contraction is nowhere of the scale of equivalent falls in home ownership in the US and UK and New Zealand over the same period. </p>
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<p>What’s more interesting than the overall trend, is the greater decline in outright home ownership, involving no mortgage debt, from 32.1% to 31.0% between 2011 and 2016. There’s also a lesser decline in home owners who are purchasing with mortgage debt 34.9% in 2011 compared with 34.5% in 2016. </p>
<p>The opportunity <a href="http://apo.org.au/node/66261">households now have</a> to borrow against their mortgage loans for spending undoubtedly accounts for some of this change. Also contributing to this is home purchasers are less likely to reach retirement age with no remaining mortgage debt, in the same numbers as previous eras.</p>
<p>Another aspect of housing affordability is masked by these numbers - the wide variation in being able to purchase a home according to age and income. <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0012/2208/AHURI_Final_Report_No232_Generational-change-in-home-purchase-opportunity-in-Australia.pdf">Recent evidence indicates</a> would-be-home-owners try various means including very high mortgage debt and moving to outer urban locations away from employment and into smaller dwellings, to be able to buy a house. Some even delay having kids. </p>
<p>Census figures show that for people wanting to purchase a home, a change in state or city location may be an option. According to the data Darwin was the most expensive city to buy in, whereas Hobart was the cheapest for home purchasers.</p>
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<p>For households across the income spectrum, 7.2% of purchasers are paying more than 30% of their income on mortgage costs, the data shows. This figure is likely to be far higher among the lowest income (40% of households) for whom such costs place them in housing poverty.</p>
<p>Given the national obsession with investment in private rental, it’s no surprise that the proportion of all Australian households now renting has also increased. Census 2016 results show the private rental sector grew in size, from 21.0% in 2006, to 22.8% in 2011 and to 24.9% in 2016. </p>
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<p><iframe id="tc-infographic-112" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/112/1a6ea8866c3196dd456f80bbc94bc79e3591613f/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
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<p>In 2016 a total of 2,059,956 Australian households rented privately, either from real estate agents or private landlords.</p>
<p>The growth of the private rental sector largely reflects the high costs of home purchase. Many households who rent have a <a href="https://theconversation.com/the-insecurity-of-private-renters-how-do-they-manage-it-77324">relative lack of security</a> and control over rental increases.</p>
<p>For those unable to pay rent in the private market, social housing is likely to provide little relief. Census data shows overall rates of social housing declining from 5.0% in 2006 to 4.2% in 2016. In this context, the <a href="http://www.homelessnessaustralia.org.au/index.php/about-homelessness/homeless-statistics">growth in rates of homelessness</a> in the last decade is perhaps not surprising.</p>
<p>For Indigenous Australians, the housing picture is different. Census 2016 data show among households in which at least one resident is Aboriginal and/or Torres Strait Islander, 12.2% are outright owners, 25.9% are purchaser owners, 32.4% are renting privately. Around a fifth of households, 21.5%, live in social housing, reflecting targeted social housing programs in metropolitan, rural and regional areas.</p>
<p>Overall, home ownership has not changed as dramatically in the last decade, as some would have anticipated. However, it’s likely with the labour market being what it is and the adaptations people are making to try and buy a home, there may be longer-term problems to be seen in future.</p>
<p>Excessive household debt, polarisation of cities into low and high income earning areas and deepening family housing constraints indicate these Census figures likely mask bigger problems. This may translate over time into a more costly social problem, as increasing proportions of households require housing assistance of some form. Australian society could become even more divided on the basis of housing wealth and opportunity, if these trends continue, as we expect they will.</p>
<hr>
<p><em>Figures in this article has been updated since publication, from being based on ABS 2016 time series profile data, to figures based on ABS 2016 community and general profile data.</em></p><img src="https://counter.theconversation.com/content/80068/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wendy Stone receives funding from the Australian Research Council (ARC) and the Australian Housing and Urban Research Institute (AHURI). </span></em></p><p class="fine-print"><em><span>Margaret Reynolds receives funding from the Australian Research Council (ARC) and the Australian Housing and Urban Research Institute (AHURI). </span></em></p><p class="fine-print"><em><span>Terry Burke receives funding from the Australian Housing and Urban Research Institute and is on the board of the Community Housing Federation of Victoria.</span></em></p>The latest 2016 Census data assesses what the national home ownership and rental rates are and how these vary location. It also gives us a picture of mortgage and rental costs.Wendy Stone, Associate Professor, Centre for Urban Transitions, Swinburne University of TechnologyMargaret Reynolds, Researcher, Centre for Urban Transitions, Swinburne University of TechnologyTerry Burke, Professor of Housing Studies, Centre for Urban Transitions, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/765052017-04-30T20:03:38Z2017-04-30T20:03:38ZFour ways an Australian housing bubble could burst<figure><img src="https://images.theconversation.com/files/167110/original/file-20170428-15112-1x3n2qr.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">The Conversation </span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>There’s been quite a bit of speculation over whether Australia has a <a href="https://theconversation.com/what-economics-has-to-say-about-housing-bubbles-74925">property market bubble</a> - where house prices are over-inflated compared to a benchmark - and when it might burst. According to housing experts, there are at least four scenarios where this could happen.</p>
<p>Australia could see a property bubble burst due to:</p>
<ul>
<li><a href="#scenario1">Lending tightening, interest rate hikes and mortgage stress</a></li>
<li><a href="#scenario2">Underemployment and unemployment creating a slow deflation</a></li>
<li><a href="#scenario3">Government intervention failure and market repair</a></li>
<li><a href="#scenario4">Global crisis</a></li>
</ul>
<p>These four scenarios focus on different tension points in Australia’s and the global economy. One scenario focuses on the balance of actions between regulators like APRA and the Reserve Bank, combined with household mortgage stress. Another envisions the affect that unemployment might have in certain areas. </p>
<p>Some of the factors we may see play out, such as the federal and state government trying to intervene to “fix” problems in the market, as happens in one scenario. But other factors may be out of the government’s control, for example, where a global crisis pushes up risk premiums.</p>
<p>All of these scenarios highlight just how complicated and interrelated the steps that lead to a property bubble burst could be.</p>
<hr>
<h2><div id="scenario1">Lending tightening, interest rate hikes and mortgage stress</div></h2>
<p>Associate Professor Harry Scheule, UTS Business School</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166385/original/file-20170424-25594-sr2cd9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166385/original/file-20170424-25594-sr2cd9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=329&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166385/original/file-20170424-25594-sr2cd9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=329&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166385/original/file-20170424-25594-sr2cd9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=329&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166385/original/file-20170424-25594-sr2cd9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=413&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166385/original/file-20170424-25594-sr2cd9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=413&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166385/original/file-20170424-25594-sr2cd9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=413&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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</figure>
<p>Following <a href="https://theconversation.com/the-risks-in-australias-housing-market-shouldnt-be-downplayed-67056">concerns of the housing bubble</a>, bank regulator APRA increases bank lending standards, it also increases the <a href="http://www.afr.com/brand/chanticleer/business-banks-have-an-edge-in-capital-constrained-world-20170407-gvg9wn">risk weight on Australian mortgages</a> resulting in lower loan supply and higher loan costs. Banks are encouraged to reduce interest-only loans, hold a greater amount of costly capital <a href="https://theconversation.com/rising-mortgage-rates-is-it-time-to-refinance-your-home-loan-49236">(making home loans more expensive)</a> and reduce the loan amounts offered to applicants <a href="http://www.afr.com/business/banking-and-finance/financial-services/tougher-banking-stress-tests-on-the-horizon-20170407-gvgabj">due to higher future interest scenarios</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/234016/original/file-20180829-86150-1pqgqgm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/234016/original/file-20180829-86150-1pqgqgm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=274&fit=crop&dpr=1 600w, https://images.theconversation.com/files/234016/original/file-20180829-86150-1pqgqgm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=274&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/234016/original/file-20180829-86150-1pqgqgm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=274&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/234016/original/file-20180829-86150-1pqgqgm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=344&fit=crop&dpr=1 754w, https://images.theconversation.com/files/234016/original/file-20180829-86150-1pqgqgm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=344&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/234016/original/file-20180829-86150-1pqgqgm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=344&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Following increases in interest rates in the US and Europe, as those markets recover, the Australian dollar begins to decline – forcing the Reserve Bank of Australia (RBA) to increase interest rates.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166227/original/file-20170421-12640-1lrrxft.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166227/original/file-20170421-12640-1lrrxft.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=274&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166227/original/file-20170421-12640-1lrrxft.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=274&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166227/original/file-20170421-12640-1lrrxft.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=274&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166227/original/file-20170421-12640-1lrrxft.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=344&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166227/original/file-20170421-12640-1lrrxft.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=344&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166227/original/file-20170421-12640-1lrrxft.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=344&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Higher interest rates lead to higher monthly repayments, as most of Australia’s home loans are adjustable. Interest only loans are the most exposed. Higher interest rates also <a href="https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2781359_code659451.pdf?abstractid=2781359&mirid=1">lead to more mortgage delinquencies.</a> </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/167116/original/file-20170428-15097-i6a8cl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/167116/original/file-20170428-15097-i6a8cl.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=274&fit=crop&dpr=1 600w, https://images.theconversation.com/files/167116/original/file-20170428-15097-i6a8cl.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=274&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/167116/original/file-20170428-15097-i6a8cl.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=274&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/167116/original/file-20170428-15097-i6a8cl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=344&fit=crop&dpr=1 754w, https://images.theconversation.com/files/167116/original/file-20170428-15097-i6a8cl.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=344&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/167116/original/file-20170428-15097-i6a8cl.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=344&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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</figure>
<p>The banks tighten bank lending standards in response to the increase in delinquencies. This further constrains interest-only borrowers seeking to refinance after the end of the interest-only terms. This means more mortgage stress, as many had expected to roll over the interest-only period indefinitely, but now they are forced to make principal repayments next to interest payments.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166235/original/file-20170421-12627-djg6hq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166235/original/file-20170421-12627-djg6hq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166235/original/file-20170421-12627-djg6hq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166235/original/file-20170421-12627-djg6hq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166235/original/file-20170421-12627-djg6hq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=359&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166235/original/file-20170421-12627-djg6hq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=359&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166235/original/file-20170421-12627-djg6hq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=359&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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</figure>
<p>The cycle between delinquencies and tightening bank lending standards continues and as a result there’s a noticeable drop in loan supply and a fall in house prices.</p>
<hr>
<h2><div id="scenario2">Underemployment and unemployment create a slow deflation</div> </h2>
<p>Danika Wright, Lecturer in Finance, University of Sydney</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166392/original/file-20170424-12658-14s147l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166392/original/file-20170424-12658-14s147l.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=320&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166392/original/file-20170424-12658-14s147l.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=320&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166392/original/file-20170424-12658-14s147l.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=320&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166392/original/file-20170424-12658-14s147l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=403&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166392/original/file-20170424-12658-14s147l.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=403&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166392/original/file-20170424-12658-14s147l.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=403&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Unemployment and underemployment - workers who want to work more but can’t - increase. As the apartment development boom dies down, and without a mining boom to replace it, <a href="http://www.afr.com/business/banking-and-finance/financial-services/fitch-warns-on-debt-underemployment-risk-for-housing-20161122-gsumxa">construction industry workers are at high risk</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166239/original/file-20170421-12629-1g17gp1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166239/original/file-20170421-12629-1g17gp1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=267&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166239/original/file-20170421-12629-1g17gp1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=267&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166239/original/file-20170421-12629-1g17gp1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=267&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166239/original/file-20170421-12629-1g17gp1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=335&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166239/original/file-20170421-12629-1g17gp1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=335&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166239/original/file-20170421-12629-1g17gp1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=335&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Households with a lot of mortgage debt are forced to limit their spending, particularly on discretionary items. This in turn affects companies that employ retail workers, reducing hours and employment.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166240/original/file-20170421-12645-1thbkt5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166240/original/file-20170421-12645-1thbkt5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=267&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166240/original/file-20170421-12645-1thbkt5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=267&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166240/original/file-20170421-12645-1thbkt5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=267&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166240/original/file-20170421-12645-1thbkt5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=335&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166240/original/file-20170421-12645-1thbkt5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=335&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166240/original/file-20170421-12645-1thbkt5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=335&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Employment opportunities are a major component of house price amenity, in part because demand for housing is <a href="http://www.sciencedirect.com/science/article/pii/0166046295021213">pushed higher by inbound work-related migration</a>. So, as there are fewer jobs nearby, the amenity value of some areas decreases.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/167114/original/file-20170428-15121-1a3mn50.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/167114/original/file-20170428-15121-1a3mn50.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=238&fit=crop&dpr=1 600w, https://images.theconversation.com/files/167114/original/file-20170428-15121-1a3mn50.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=238&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/167114/original/file-20170428-15121-1a3mn50.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=238&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/167114/original/file-20170428-15121-1a3mn50.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=300&fit=crop&dpr=1 754w, https://images.theconversation.com/files/167114/original/file-20170428-15121-1a3mn50.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=300&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/167114/original/file-20170428-15121-1a3mn50.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=300&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>The number of <a href="http://www.ahuri.edu.au/__data/assets/pdf_file/0010/2233/AHURI_Final_Report_No145_Mortgage-default-in-Australia-nature,-causes-and-social-and-economic-Impacts.pdf">people at risk of defaulting on their mortgage increases</a> in areas where there is a loss of employment or reduced income. In 2008, arguably the last time Sydney house prices went through a correction, the incidence of mortgage defaults and property price declines was geographically localised.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/167115/original/file-20170428-15086-1qrzafm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/167115/original/file-20170428-15086-1qrzafm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=267&fit=crop&dpr=1 600w, https://images.theconversation.com/files/167115/original/file-20170428-15086-1qrzafm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=267&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/167115/original/file-20170428-15086-1qrzafm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=267&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/167115/original/file-20170428-15086-1qrzafm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=335&fit=crop&dpr=1 754w, https://images.theconversation.com/files/167115/original/file-20170428-15086-1qrzafm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=335&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/167115/original/file-20170428-15086-1qrzafm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=335&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Borrowers who have the least amount of equity in their homes (typically the least wealthy, younger and newer entrants to housing market) <a href="https://theconversation.com/not-on-struggle-street-yet-but-mortgage-stress-risk-is-rising-64293">are the hardest hit</a> by falling property values. They are more likely to end up “underwater” – that is, owing more than the property is now worth – and face the prospect of a distressed sale. This in turn contributes to the downward spiral in house prices.</p>
<p>Australia has tighter lending criteria than regulators enforced before the global financial crisis in the United States. But concerns by regulators, including APRA, over current lending practices and potentially fraudulent activities <a href="http://www.theaustralian.com.au/business/financial-services/apra-warns-banks-to-review-mortgages-for-dodgy-details/news-story/d32bf5094725b992a77e167dcdc56385">raise questions over the real quality of mortgages</a> and the ability of borrowers to repay them.</p>
<hr>
<h2><div id="scenario3">Government intervention failure and market repair</div></h2>
<p>Professors of Economics, Jason Potts and Sinclair Davidson, RMIT</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166402/original/file-20170424-22270-1wxliec.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166402/original/file-20170424-22270-1wxliec.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=320&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166402/original/file-20170424-22270-1wxliec.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=320&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166402/original/file-20170424-22270-1wxliec.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=320&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166402/original/file-20170424-22270-1wxliec.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=402&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166402/original/file-20170424-22270-1wxliec.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=402&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166402/original/file-20170424-22270-1wxliec.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=402&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>A combination of <a href="http://www.rba.gov.au/publications/bulletin/2015/sep/3.html">low interest rates and low growth</a> in new housing stock drive up Australian housing prices, a situation compounded by poor policy choices by state and federal governments and high demand from foreign residential property investors.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/201261/original/file-20180109-83567-182h97.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/201261/original/file-20180109-83567-182h97.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=267&fit=crop&dpr=1 600w, https://images.theconversation.com/files/201261/original/file-20180109-83567-182h97.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=267&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/201261/original/file-20180109-83567-182h97.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=267&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/201261/original/file-20180109-83567-182h97.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=335&fit=crop&dpr=1 754w, https://images.theconversation.com/files/201261/original/file-20180109-83567-182h97.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=335&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/201261/original/file-20180109-83567-182h97.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=335&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>As a result, housing is misallocated in the Australian market, across demographic and especially age groups. This produces demographic pressures, as millennials delay leaving home, delay starting families. This leads to political pressure on governments – increases the urge to intervene.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166251/original/file-20170421-12669-19vk1qg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166251/original/file-20170421-12669-19vk1qg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=291&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166251/original/file-20170421-12669-19vk1qg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=291&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166251/original/file-20170421-12669-19vk1qg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=291&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166251/original/file-20170421-12669-19vk1qg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=366&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166251/original/file-20170421-12669-19vk1qg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=366&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166251/original/file-20170421-12669-19vk1qg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=366&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>The federal government intervenes, blaming the secondary drivers (particularly the non-voting group: foreign investors). They increase restrictions on foreign investment in residential housing stock.</p>
<p>The federal government also lobbies APRA to increase rules on financial products, while promoting a scheme to subsidise and promote first home ownership. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166405/original/file-20170424-23807-i1c8wi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166405/original/file-20170424-23807-i1c8wi.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=291&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166405/original/file-20170424-23807-i1c8wi.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=291&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166405/original/file-20170424-23807-i1c8wi.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=291&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166405/original/file-20170424-23807-i1c8wi.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=366&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166405/original/file-20170424-23807-i1c8wi.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=366&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166405/original/file-20170424-23807-i1c8wi.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=366&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Because none of these previous measures from the federal government affect the primary drivers of the misallocation of housing, domestic interest rates don’t change, and state governments do not act to release new stock. As a result, housing prices continue to grow.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166406/original/file-20170424-27254-4qwo2z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166406/original/file-20170424-27254-4qwo2z.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=331&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166406/original/file-20170424-27254-4qwo2z.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=331&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166406/original/file-20170424-27254-4qwo2z.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=331&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166406/original/file-20170424-27254-4qwo2z.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=416&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166406/original/file-20170424-27254-4qwo2z.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=416&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166406/original/file-20170424-27254-4qwo2z.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=416&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Increasingly alarmed that house prices continue to rise, the federal government starts to panic, threatening ever further regulation and starts to blame the financial system. This triggers the RBA to finally act, raising interest rates.</p>
<p>As interest rates rise, this causes mortgage stress, resulting in default among investors with high amounts of debt, pushing these properties onto the market. These distressed sales finally cause prices to fall.</p>
<hr>
<h2><div id="scenario4">Global crisis </div></h2>
<p>Timo Henckel, lecturer at the Research School of Economics and research associate at the Centre for Applied Macroeconomic Analysis, ANU </p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166412/original/file-20170424-12629-1juog2j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166412/original/file-20170424-12629-1juog2j.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=314&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166412/original/file-20170424-12629-1juog2j.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=314&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166412/original/file-20170424-12629-1juog2j.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=314&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166412/original/file-20170424-12629-1juog2j.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=395&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166412/original/file-20170424-12629-1juog2j.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=395&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166412/original/file-20170424-12629-1juog2j.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=395&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>International crisis (whether it be political, military, economic) leads to an increase in global risk premiums.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166416/original/file-20170424-12645-qj07.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166416/original/file-20170424-12645-qj07.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=291&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166416/original/file-20170424-12645-qj07.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=291&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166416/original/file-20170424-12645-qj07.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=291&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166416/original/file-20170424-12645-qj07.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=366&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166416/original/file-20170424-12645-qj07.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=366&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166416/original/file-20170424-12645-qj07.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=366&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Borrowing costs for Australian banks rise because of this and supply of global capital falls, pushing up mortgage rates in Australia.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166420/original/file-20170424-12658-z8xdgo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166420/original/file-20170424-12658-z8xdgo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=260&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166420/original/file-20170424-12658-z8xdgo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=260&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166420/original/file-20170424-12658-z8xdgo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=260&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166420/original/file-20170424-12658-z8xdgo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=327&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166420/original/file-20170424-12658-z8xdgo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=327&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166420/original/file-20170424-12658-z8xdgo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=327&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>The most vulnerable mortgagees can no longer afford their mortgages and are forced to sell their homes.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/166424/original/file-20170424-12658-1fhdu2b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/166424/original/file-20170424-12658-1fhdu2b.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=267&fit=crop&dpr=1 600w, https://images.theconversation.com/files/166424/original/file-20170424-12658-1fhdu2b.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=267&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/166424/original/file-20170424-12658-1fhdu2b.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=267&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/166424/original/file-20170424-12658-1fhdu2b.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=335&fit=crop&dpr=1 754w, https://images.theconversation.com/files/166424/original/file-20170424-12658-1fhdu2b.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=335&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/166424/original/file-20170424-12658-1fhdu2b.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=335&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>House prices fall which, coupled with rising interest rates, adds further distress to households’ balance sheets, leading to more selling of houses and so on.</p><img src="https://counter.theconversation.com/content/76505/count.gif" alt="The Conversation" width="1" height="1" />
There’s been quite a bit of speculation over whether Australia has a property market bubble - where house prices are over-inflated compared to a benchmark - and when it might burst. According to housing…Wes Mountain, Social Media + Visual Storytelling EditorJenni Henderson, Section Editor: Business + EconomyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/758572017-04-09T20:02:42Z2017-04-09T20:02:42ZThree charts on mortgage stress: it isn’t as bad as you might think<p><em>This piece is part of our new Three Charts series, in which we aim to highlight interesting trends in three simple charts.</em></p>
<p>The current debate about housing muddles two separate issues: the affordability of housing, and the risk in the banking system of any significant fall in house prices. Clearly, they are both important issues and the link between them is the potential for a lot of home owners to overreach in their finances, to not be able to repay their loans, and so to bring down their banks.</p>
<p>But when you look at the data on mortgage stress the systemic risk of this overreach looks small. Data from the <a href="http://www.apra.gov.au/adi/Publications/Pages/Quarterly-ADI-Property-Exposures-statistics.aspx">Australian Prudential Regulation Authority</a> (APRA) reveals the average balance on housing loans has barely trended upwards over the last five years (see our first chart below). </p>
<p>This was during a period when <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0">house prices have risen</a> quite strongly. In effect, this means that, on average, people have more equity in their houses to stand behind their borrowings. </p>
<p>This is not just true for the average but also if you look at investor loans or for low documentation (loc-doc) loans (these are aimed at those who cannot provide the usual required paperwork, for example self-employed people). The same trends emerge. It’s not clear from this that people are taking on excessive risk – and certainly not recently.</p>
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<p>Even for new loans you get the same basic picture. The chart below shows the loan to valuation ratios for new loans. What is clear is that for most new loans people are borrowing between 60% and 80% of the value of their houses. </p>
<p>The proportion of people who have very high exposure to a fall in house prices – those with loan to valuation ratios above 90% – has been declining over time. Once again, the basic picture is one of prudent households, rather than a community of people gambling on house price rises.</p>
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<p>A lot of the confusion about housing arises because people make inappropriate comparisons. One common mistake is to compare the amount of housing debt with national income. This is highly misleading. </p>
<p>A more correct comparison is between your income and the amount of your income needed to service your loan. At a national level, this means we should look at the size of national income and the amount of income needed to service the debt (not the amount of debt). </p>
<p>An alternative that the Reserve Bank uses is to compare the amount of debt people have with the amount of assets they hold. As we can see in the chart below, the value of household liabilities has been increasing but the total value of assets held by households appears to have been rising faster. Again, there is no clear case that the household sector has borrowed excessively.</p>
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<p>None of this is to deny that house prices can fall, or that some people are finding it very hard to buy somewhere to live in Sydney. Houses are much cheaper in other parts of Australia and property prices have even been falling recently in some regions.</p><img src="https://counter.theconversation.com/content/75857/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock works for the Australian Centre for Financial Studies, a public-interest research centre within Monash University, which receives funding from a wide range of industry and governmental groups. He has no direct bank shareholdings and no political affiliations.</span></em></p>When you look at the data (in three charts) on mortgage stress, the systemic risk of people not being able to repay their home loans appears small.Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.