Will we 'eat dog food’ before defaulting on our mortgages?
Aussie property owners will do anything to avoid relinquishing their house to the bank. Loan borrowings are high, but overseas research shows two triggers are needed for foreclosures to happen.
Residz Team 3 min read
“Australians will eat dog food before defaulting on mortgages” is a line that catches your attention, doesn’t it? According to an economist quoted in Financial Times a former Reserve Bank governor made this comment in private, and the economist used it to drive home his point that defaulting carried a significant amount of social stigma in Australia.
Green-lipped mussel anyone?
Given the price of my dog’s kibble, I’ll be giving my kelpie rice and pasta before I eat his chicken, salmon, and green-lipped mussel combo thanks. But, I totally get the former governor’s point. I probably would give the kibble a sniff before I took myself off to the bank, cap in hand.
But haven’t we been told we are rich?
We Australians are, per capita, some of the richest people in the world. So why are we talking about mortgage defaulting? Expect to see quite a few articles of this ilk over the next year as Australian mortgage holders sharpen their budgets to cope with predicted interest rate rises.
Rich but up to our eyeballs in debt
Rate rises do hurt when coupled with the rising cost of living and rising levels of homeowner debt. More expensive housing calls for bigger mortgages, and Australia’s capital cities are in the Top 20 for least affordable homes in the world. This Statista chart shows the value of owner-occupier and investor mortgage debt outstanding in Australia from 2011 to 2021.
Record housing prices and record borrowing
According to the Australian Bureau of Statistics, in January 2022 in seasonally adjusted terms, the value of new loan commitments hit a record high of $33.7 billion, which was 18.2 percent higher compared to a year ago.
The biggest driver was in investor loans, which rose 6.1 percent to a record high of $11.0 billion. $22 billion was borrowed by owner occupiers, a rise of 1 percent (ABS).
Deferrals due to the pandemic
Certainly the pandemic saw lots of deferrals (if not defaults) as people lost income due to lockdowns. During the 2020 lockdowns loan deferrals got as high as 7.9%. According to the Australian Banking Association, during the peak of the crisis in 2020, almost 500,000 home loans and more than 225,000 business loans were deferred.
Default rates low
The bank holiday on repayments stopped in March 2021, and reports suggested only a few thousand mortgagees in each bank’s portfolio were subsequently forced to sell.
Two triggers needed
Overseas research cited in this discussion paper by Michelle Bergmann shows that most foreclosures are a combination of two triggers. The first is a change in the borrower's circumstances that limits their ability to repay their mortgage (such as becoming unemployed or ill); the second is a decrease in the value of the property that causes the loan to fall into negative equity.
Options if only one trigger
Both triggers are needed, the article states.
“With only the first trigger, the borrower may enter arrears but can profitably sell their house to avoid foreclosure. With only the second trigger, the borrower can continue to repay their mortgage,” writes Michelle Bergmann.
So, buy carefully or join the dog
A strong economy and low unemployment rate help reduce defaults, as does taking care when financing and buying property. Real estate experts repeat the words “location, location, location” and we say “research, research, research.” If you buy a home with a higher investability score on the Residz Investability Index you may be better protected from the second trigger of a decrease in value.
Experts are divided on their predictions for property in 2022, but a good location is always a hedge against a downturn. Then, if your circumstances change, hopefully you won’t need to read the ingredients list on packets of dog food.
Image: Dog eating dog food, GreatPetCare.