Different Shades of Mortgage Stress: How Repayment Problems Are Affecting Australia’s Society and Economy
Published 9:15 pm 20 Nov 2019
The rising cost of living has an enormous impact on the Australian people and economy. In this article, DG Institute founder, Dominique Grubisa takes a closer look at the effects of mortgage stress.
Over the last few years, we’ve seen dramatic house price changes. Rising property prices lead to the average home buyer having to take out a larger mortgage. Couple that with credit card debt and stalls in the rise of household income and you have a powder keg.
>< Simply put, almost one-third of Australians find themselves in mortgage stress. And even with the decrease in housing costs that we’ve seen in 2019, the issue isn’t getting better.
The result is that many Australians find themselves in a debt trap that’s very difficult to escape from.
But it’s not impossible.
We’ve spoken before about some of the things that you can do to avoid mortgage stress. But to take advantage of that advice, you also need to understand the problem and the general effects of debt on the economy.
The Growing Problem
The key thing to note about mortgage stress is that there are different levels.
Many households start out in a mild stress position. This usually means that they’re handling their home loan repayments, albeit with a little difficulty. However, that difficulty grows and grows as more debts pile on. Over time, a tough few weeks become a tough few months. And within a couple of years, such households move from mild stress to severe financial stress.
We can see a perfect example of this in Western Australia.
During a recent interview with DG Institute, Martin North of Digital Finance Analytics spoke about the state. He said that the signs of increasing numbers of people experiencing mortgage stress existed two or three years ago.
“We’re seeing high levels of defaults, high levels of for sales, and significant social pressures in that particular area.”
In other words, debt continues to rise and it has wider ramifications for the state’s economy. People are losing their homes or finding themselves forced to sell. That has an effect on local businesses because they attract less customers. The area becomes less desirable as more people move away and what you find is that various locations enter a slump.
How it Happens
Mortgage stress typically comes down to rising house costs coupled with low or non-existent wage growth.
This creates pressure on households, which leads them into a debt trap. Dominique Grubisa explains the trap during the interview with Martin North:
“If I am paying $1,000 a month of my mortgage, but I’m only getting $800 in the door, I have a $200 shortfall. That might be mild. And I could circle the drain for two or three years just borrowing from Peter to pay Paul.”
The problem in this example is that it involves creating more debt to service larger debts. That’s how stress moves from mild to severe. Eventually, the debts mount until the mortgage is only one of many financial worries.
And it’s not just low-income households that get affected.
An article on Your Mortgage points this out when quoting a survey related to mortgage stress:
“26% of those in the highest income group said they were impacted by their home mortgage payments more than their children’s expenses and level of household debt.”
That’s the debt trap in action. The mortgage repayments become more burdensome, which leads to more loans getting taken out. Those loans often have higher interest rates, which only add to the problem. Now, you have several loans to repay and an ever-dwindling cash reserve to pay them with.
It’s like you’re slipping into quicksand. The more you struggle against the debt, the deeper it drags you in.
And right now, the situation is as bad as it’s ever been. According to the Reserve Bank of Australia, the country has one of the highest ratios of debt to income in the world.
The Effect of Mortgage Stress and the Economy
Of course, all of these issues have a massive effect on the people experiencing them. Financial stress leads to people struggling to maintain their homes, as we saw in Western Australia.
However, it’s also worth noting the severe effects that mortgage stress has on the overall economy. And beyond that, it has social consequences that only serve to grow the problem.
North explains some of the issues that we’re seeing in Western Australia:
“<There are> high levels of unemployment, underemployment. <There are> gangs roaming the streets…There are very difficult social issues.”
Households simply aren’t spending money because they don’t have money to spend. This has a direct effect on local businesses, which can’t sustain high levels of service. That results in people getting laid off from their jobs, which creates even more financial strain.
Some companies go out of business or choose to relocate. Again, that leads to a loss of jobs that exacerbates the unemployment issues.
All of these problems compound to the point where the debt trap no longer just affects individuals. It affects the fortunes of the locations that they call home.
Interestingly, North brings those wider-reaching effects back to the personal level. He notes that these financial issues tie into people’s relationship problems and overall well being.
When you look at mortgage stress from that perspective, it’s about so much more than the financial side of things. Avoiding it leads people to enjoy happier and healthier lives.
What This Means for the Future
On a broader scale, these issues have a direct effect on the property market.
We’re seeing property price changes at a level that we haven’t seen before. North points to unit prices in North Ryde, which have fallen in value by about 30%. That’s due to much lower demand, coupled with people’s inability to afford the peak prices.
Of course, those drops in property values affect the people already living in the properties. Those who took out 90% mortgages find that they suddenly lose huge chunks of equity. And again, we see the debt trap in play as those loses create new issues.
We’re also seeing more established homeowners making the decision to sell. Those who’ve built a fair amount of equity already may choose to sell before prices dip any lower. The problem here is that this blocks long-term growth.
North says that lenders have to bite the bullet and recognise the role they’ve played in this situation. Too many people have been able to borrow more than they could really afford. And until that situation’s confronted properly, we may not see a recovery from these record levels of mortgage stress.
How to Protect Yourself?
As you can see, mortgage stress can affect anybody. And it has wider ramifications for the economy that often go unnoticed until they’re happening.
So, the question now is how can you protect yourself from the dangers of mortgage stress?
Refinancing your mortgage may be an option. If you can find a better deal that offers lower interest rates and corrects over-borrowing, you give yourself a level of protection.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practising legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.