Mortgage stress is typically defined as being when a household is paying above 30% of its income on mortgage repayments. Whilst I agree with the 30% hurdle in this definition, what's missing is an understanding of what a household really is and what makes up the income upon which the 30% assessment is based. This is where real mortgage stress resides.
In attempting to quantify mortgage stress we impassively talk in economic units such as household income and house prices. However to really understand mortgage stress we need to consider a home instead of a house and a family instead of a household.
To me a house is an asset on a balance sheet and a household represents the occupants in a form of accommodation regardless of whether they are a family unit or flat mates. A home on the other hand is where families live and households are made up of families comprising various combinations of provider, nurturer and dependents, all performing important societal roles beyond just providing household income and being consumers. Only by relating to the real life circumstances of a family in their home can we properly understand mortgage stress and determine sustainable solutions.
Over the last 30 years there has been a fundamental shift in the pricing of the family home. Whereas the price of the family home used to be based on one income in the last 3 decades it has changed to being based on two.
Putting this in social terms - whereas the price of the family home was based on the income of the family's provider/protector it now also requires an income from the family's carer/nurturer.
When I started in real estate I was encouraged to save a 30% deposit for my first home. I didn't achieve that but I did save 20% meaning I borrowed from the bank on an 80% LVR. An LVR we now hear a lot of property and finance industry participants complaining as being too low. As importantly, if not more, the interest cover on my first mortgage was based on my income only, it did not include my wife's and in our mortgage application we had to allow for a couple of percentage points increase in the interest rate.
In 1992 the property developer I was working for went bust & I was out of work for 6 months. Fortunately we were able to rely on my wife's income plus our savings so we never missed a mortgage payment. Had our mortgage been originally set based on both our incomes we would have been in serious trouble. And even though we were able to make our repayments I can assure you we lived with mortgage stress for those 6 months with every dollar being accounted for.
For many Australian families this is how they live everyday. The provider/protector and the carer/nurturer both need to work in order to meet the mortgage payments, and they still account for every dollar. Mum doesn't work because she wants to; she works because she has to.
If Mum is working because she has to instead of wanting to (note the difference - I have nothing against working Mums, as long as its their choice) then how does she find the emotional strength, let alone time, to nurture the family? By my way of thinking mortgage stress can exist even when mortgage payments are less than 30% of a households income.
So how did home pricing evolve from being based on one income to two? In short - easy credit and government handouts.
Without any question the First Home Owners Grant increased prices. That's why many refer to it as the home vendors grant. Instead of home prices naturally coming back to what families could afford governments on both sides artificially increased affordability to maintain prices (simple supply-demand economics). The trouble with this social policy is that when you turn off the bonus you instantly reduce affordability. Sales drop and industry calls for the re-introduction of government assistance. Our societal choice is to indefinitely maintain such schemes or take our medicine and stay off these artificial benefits that are ultimately not beneficial (think Greece).
Six years ago I could have bought property with almost no deposit. Heck, they'd even lend me the deposit! Banks were throwing credit at us; remember “Equity Mate”? Not only did lending institutions lower borrower criterion but also by including the partner’s income we could afford an even more expensive property. Easy credit is another form of artificially increasing affordability to improve price growth – but at what cost?
Easy credit and government handouts were the major contributors to the median house price approximately doubling in most capital cities in the first decade of this century.
Do government incentives and lower lending criterion relieve mortgage stress or ultimately just make it worse?
The property market will come back into equilibrium; it’s nature’s way and is inevitable. It’s only a question of how long this will take but the more we interfere in this re-balancing the longer it will take. For various reasons America let its real estate market drop whereas in Australia our banks have endeavoured to protect their balance sheets by softening the landing thereby prolonging the time it will take for the market to realise a new equilibrium. It is a question of affordability (supply & demand); if prices don’t come back then we have to wait until demand catches up through affordability i.e. wages growth.
The societal question we have to ask ourselves is how we want to measure affordability - as a household or family?
This article first appeared in Australian Broker Magazine - March 2012