One of the common questions asked by 30- to 40-year-olds is ‘should I borrow a huge sum of money to buy a house?’.
The answer depends to an extent on the buyer and the area, but all borrowers face growing risks – especially upward pressure on interest rates from abroad and falling dwelling prices in some areas.
Awareness of those risks seems to be growing very slowly, however.
In a speech in Sydney on Monday, Australian Prudential Regulatory Authority chairman Wayne Byers warned that despite APRA’s attempt to tighten up mortgage lending practices, Australians are still borrowing too much.
Around 10 per cent of new loans are worth more than six times the borrowers’ incomes which Mr Byers says “is well north of what has been permitted in other jurisdictions grappling with high house prices and low interest rates, such as the UK and Ireland”.
Loose lending has helped push house prices beyond the reach of ‘Generation Rent’, for whom home ownership is now an impossible dream.
But on the flip-side we now have what you might call ‘Generation Spent’ – those who borrowed too much and whose after-mortgage spending power is becoming exhausted.
Mr Byers warned that households scraping by on today’s after-mortgage income may not be about to make ends meet in future.
“It is easy to run up debt,” he said, “but far harder to pay it back down when circumstances change. It is in everyone’s long-term interest to maintain sound standards when times are good – that is, after all, when most bad loans are made.”
But the banks haven’t been maintaining sound standards – and APRA needs to do a lot more to bring them into line.
Banks have been able to overlook a borrower’s “other financial commitments” which “remain something of a blind spot for lenders”, and have often used unrealistic estimates of a borrower’s real living costs.
Looking ahead, that’s a big problem because the house price growth that bailed out so many imprudent borrowers in the past 20 years is coming to an end.
Super low interest rates have given many borrowers a false sense of security, because being just above the ‘mortgage stress’ level of paying a third of your income to the bank each month doesn’t feel too bad.
However, things are changing.
As Mr Byers pointed out, “a loan-to-income ratio of six times will require a borrower to commit 50 per cent of their net income to repayments if interest rates returned to their long term average of a little more than 7 per cent”.
No time to gloat
Members of Generation Rent, who’ve been doing it tough right through the house price boom, probably won’t have much sympathy for cash-strapped mortgage holders.
However, before any serious gloating sets in, it’s important to remember the deep connections between the housing market and the rest of the economy.
As the Council of Small Business has pointed out many times, heavily mortgaged homes are often surreptitiously used to help finance the owner’s small business.
When home equity evaporates or turns negative, thousands of businesses, and the jobs they support, will lose a source of cheap finance.
Likewise, as high-end mortgages creep towards gobbling up 50 per cent of their owners’ incomes, there will be less money to spend at the local cafe, on employing a lawn mower, or saving for a holiday on the coast – hurting the people providing those services as much as the debt-heavy home owner.
It’s an ugly picture. While APRA looks towards tightening lending requirement further, the truth is that Australia’s housing debt bubble should never have been allowed to grow so large in the first place.
Yet we can’t lay all the blame at the feet of highly indebted householders. For years, debt spruikers’ voices drowned out the complaints of commentators.
It’s only two-and-a-half years, remember, since former treasurer Joe Hockey was telling young Australians “there’s never been a better time to borrow” to buy a home.
Well, today there’s never been a better time to understand the risks of doing so.
Meanwhile, it’s up to APRA through prudential regulation, the Reserve Bank through monetary policy, and state and federal governments through their spending plans to try to manage a slow deflation of the debt bubble.
As Mr Byers says, it’s in everyone’s interests – renters and home owners – to get that right.