Wednesday, March 23, 2005

Australians saddled with massive housing debts

Reporter: Stephen Long
TONY EASTLEY: New figures released by the Reserve Bank show that hundreds of thousands of low-to-middle income earners are burdened with massive housing debts.

For almost one-in-five low-to-middle income families, mortgage repayments gobble up more than half their disposable income. The huge debt burden among the battlers in that group is raising questions about the lending practices of banks.

Finance Correspondent, Stephen Long.

STEPHEN LONG: The good news is the banks won't suffer too much if the economy turns sour or the Reserve Bank jacks up interest rates to crunch inflation.

The property boom may have created record debt levels, but figures released by the Reserve Bank show that 60 per cent of the debt is held by high income earners. And most of them should be able to service the loans even if rates rise sharply.

But this reassuring portrait masks high levels of indebtedness among the less well off. According to the new research, nearly 2.5 per cent of households in Australia pay more than half their disposable income to service the home mortgage. That's about 200,000 households with a big debt burden.

Mike Rafferty lectures in Finance at the University of Western Sydney, and he says that as rates go up many of these households are facing tough times.

MIKE RAFFERTY: Well, it means that they're vulnerable to even fairly small shocks. If interest rates have to go up because of labour market shortages or oil prices or any of the factors that the Reserve Bank have identified, then there's going to be a lot of pain in the mortgage belts of the big cities in Australia.

STEPHEN LONG: And it's the battlers who will be hit the hardest. Divide the population into tenths by income, and families in the third and fourth income deciles are saddled with the biggest mortgage pain.

For nearly one in five of these low-to-middle income households, more than half the family's after tax income is gobbled up by the mortgage.

And the situation is probably much worse than this, because the survey the Reserve Bank relied on was carried out in 2002, before the height of the property boom and before the last three rates rises.

Mike Rafferty says lax lending practices in a deregulated financial system are part of the problem.

MIKE RAFFERTY: You've seen more and more mortgage originators, you've also seen the banks pushing out as much money as they can onto people, and so far it's all been very profitable.

STEPHEN LONG: But the vulnerability is with the low-to-middle-income earners who've had to borrow a lot of money to break into the housing market, isn't it? It's not with the banks.

MIKE RAFFERTY: That's right, that's right. It's not… high income earners probably are going to be safe this time, unlike the early nineties. If there's going to be a bust, it looks like it may start out in the suburbs, not in the sort of wealthier areas.

STEPHEN LONG: Mike Rafferty says the vulnerability of the low to middle income households is why the Prime Minister and the Treasurer have been talking down the need for another rates rise.

MIKE RAFFERTY: It's quite clear that they understand that this could be political suicide if interest rates go up by two more half a quarter of a per cent rises, I think you're going to see a very big shift in political sentiment.

STEPHEN LONG: The battlers swung to Howard in droves at the last election, the question is will they stick in the face of housing stress and mortgage pain?

TONY EASTLEY: Stephen Long.

0 Comments:

Post a Comment

<< Home