Overseas buyers are less likely to default on loans, study finds

PROPERTY buyers from overseas backgrounds should be treated differently from locals, a new study claims. But the reason is not what you might think.

A new study has found that borrowers from multicultural back grounds are less likely to default.

PROPERTY buyers from multicultural backgrounds should be treated differently from Westerners, a new study claims.

Researchers from Swinburne University of Technology found that mortgage defaults were lower in societies where the culture was to save more and for people to control their desires and instincts, and where getting financial assistance from families was the norm — including in Asian communities.

“Our results show that lenders should take into account the cultural backgrounds of borrowers when determining how likely it is that they will default,” the researchers said.

“This is in addition to common economic factors, such as income, unemployment, and house prices, socio-demographic factors like divorce and race and health.”

In the comprehensive study of the factors influencing mortgage delinquencies, researchers used data on default rates from 42 developed and developing countries, representing about 90 per cent of the world’s gross national income and the world’s outstanding balance of housing mortgages in 2013. The rate of people who defaulted on their mortgage varied from 0.05 per cent in Hong Kong to 17.05 per cent in Greece.

The findings were demonstrated both in relatively stable economic periods (from 2010 to 2013) and during a period of financial crisis (from 2008 to 2009).

Australia has a low default rate on mortgages, thanks to a strong level of national income, stable growth of the property market and a low unemployment rate.

But it ranks high in all cultural dimensions that potentially lead to high default rate, which is accentuated during times of widespread economic hardship.

So, the researchers concluded, policymakers should be mindful of unfavourable economic conditions that may trigger default on mortgages.

PLEASURE SEEKERS VS LONG TERM THINKERS

A number of explanations were given for the findings.

“Individuals who have a tendency to enhance or protect their self esteem, by taking credit for success and denying responsibility for failure, may over-estimate their abilities make enough money to meet their long term financial obligations,” researchers said.

“They also have relatively weaker self-monitoring skills and may not budget well.”

In societies where people are expected to be independent and only take care of their own interests, the rate of default on mortgage was higher. A lack of access to support from extended families and groups is believed to make it more difficult to pay back their mortgages during periods of financial hardship.

Researchers found that borrowers in countries exhibiting higher degrees of pragmatism (such as taking a long-term view to life) were less likely to default on their mortgages.

“People in these countries have a higher tendency to save and are thought to be less likely to undertake risky mortgages,” they concluded.

In societies with a strong emphasis on enjoying life, there was a higher rate of defaults.

“These people were more likely to follow their impulses and desires and so might not allocate their financial resources efficiently,” the study found.

“They may spend more money than they can afford on leisure activities and have less savings to service their mortgages.”

TAILOR LOANS TO SAVERS

Unsurprisingly, countries with higher levels of household disposable income, lower unemployment rates and higher growth in house prices, have lower default rates on mortgage. However, national debt rules, regulations and chronic and prolonged illness, were not significantly associated with defaults on mortgages in the sample countries.

Housing mortgages account for about 75 per cent and 50 per cent of total consumer lending in the developed and developing economies, respectively.

Researchers said their findings “may be of particular importance for multinational financial institutions, which hold mortgage loans as a large portion of their assets, meaning higher default rates may significantly lower their market values”.

“Multinational financial institutions could promote their mortgage products more in societies where people receive support from their relatives or members of groups,” they suggested.

“They could also focus on countries where people have a higher propensity to save for the future and are less interested in leisure activities. This could save these institutions a lot in terms of risk, but would also be much better for their customers.”

Reza Tajaddini is a Lecturer in Finance and Hassan F. Gholipour is a Lecturer in Economics, at Swinburne University of Technology.

This article first appeared at The Conversation and is reproduced with permission.