Time to bust some myths about mortgage stress

Many of the borrowers diagnosed with cases of mortgage stress would be very surprised to learn of their grim condition.

 

The IMF warned yet again this week about Australia’s high household debt and the message immediately got mangled with reports of rising “mortgage stress” but the two are not the same. Household debt is an economic statistic, mortgage stress is an assumption and one that has so many flaws it needs to be taken with a pinch of salt.

Almost a million households are now facing “mortgage stress” says a new report from industry researcher Digital Analytics and that includes a rising number of some of the wealthiest postcodes in the nation.

But what is mortgage stress exactly? To the authors of this latest report it means there are 905,000 households where the ‘net income cannot cover ongoing costs’. To the Housing Industry Association it occurs where more than 30 per cent of household income goes on a mortgage.

In other words it is a highly flexible term that ignores all other wealth factors — a householder might have an investment property or several investment properties. At least 1.2 million Australian taxpayers are involved in negative gearing. A householder may have a successful business and they may have chosen to take advantage of still cheap home loan rates — Are they facing de facto mortgage stress or merely the pressure of running an investment portfolio?

It is also worth knowing that mortgage stress is not a self-confessed state expressed in angst by earnest survey respondents: Rather it is an economic construction — the application of a variable formula to a sample of the population and then extrapolated to national levels.

Many people classed as suffering from ‘mortgage stress’ may be blissfully unaware they are ranked as such by the nation’s economists.

Tim Reardon, the principal economist at the HIA suggests: “Mortgage stress can mean different things — if a family has a big mortgage and they are confident their property will be worth a lot more in a few year’s time they may have a different attitude to someone who is finding it a struggle.”

Martin North of Digital Analytics recently suggested: “A rising number of more affluent households are being impacted as the contagion of mortgage stress continues to spread beyond the traditional mortgage belts.”

Contagion or conflation?

Mortgage stress is not a myth — of course there is mortgage stress across Australia. No doubt larger mortgages and flat wages are contributing to stress in many households.

Yet a look at national home affordability trends over the last few years show they have been largely “range bound” as rising prices were offset by lower rates as incomes stayed very steady.

The crucial issue now is how householders will fare when rates really start to rise. This week the RBA again showed no inclination to lift official rates beyond their historic low of 1.5 per cent but when they do — as they surely will — then genuine stress around home mortgage repayments will come to the fore.

Until then — especially outside the metropolitan centres of Sydney and Melbourne — this loosely defined and very flexible term should be taken with caution.