The Age this morning led with a story about record mortgage and rental ‘stress’:
THE number of Australians under financial stress from housing costs has soared to a historic high, with more than a million households now spending at least 30 per cent of their income on loan repayments or rent.
Adding fuel to a potentially explosive election issue, census figures show that the number of households officially declared under “mortgage stress” has almost doubled in five years — to 547,054. At the same time, the number of households above the “rental stress” threshold — spending more than 30 per cent of their income in rent — has climbed to 520,598. (emphasis added)
According to an ALP press release (seemingly the source of this story) that’s equivalent to 27% of households with mortgages.
It is of course unsuprising that high property prices are flowing through to people spending more of their income on housing. But ‘stress’ in this context is a subjective rather than objective indicator, so it is not clear that we can really say that spending 30% of income on mortgage or rent payments is an ‘official’ indicator of financial stress.
Other measures of financial stress, for example, come up with lower estimates of financial problems among households with mortgages. The 2006 General Social Survey found that 16.5% of households with mortgages had experienced a cash flow problem in the previous 12 months (defined as not being able to pay a bill on time), which was slightly lower than the national average.
So where does the 30% of income figure come from? Though going for a slightly higher figure, this research note from the Parliamentary Library says that:
The basis for the above definition of mortgage stress is the general rule that financial institutions will not allow a household to take out a housing loan if the monthly home loan repayment, calculated over a 25 year term, exceeds one-third of monthly household income.
So maybe the figure is adapted from more conservative times in the banking industry. The problem, as the research note acknowledges, is that some people can prudently take on large mortgages – that repayments consuming a significant percentage of their income may not be ‘stress’ but a decision to increase housing consumption compared to other types of consumption. I could have paid less for housing, but as I don’t much like cars or driving I’m better off paying a higher mortgage and living in the inner city with no money spent on cars but a tram stop opposite a door to my building.
Perhaps recognising this, some ‘official’ sources, like the ABS, use the 30% figure but limit it to households in the bottom 40% of the income distribution. The people at NATSEM, a leading institution for analysing income distribution, similarly use the 30/40 measure (pdf). The Productivity Commission’s report on first home ownership also takes this approach. It seems more plausible than the 30% of all mortgagees’ income measure, but so far as I could see none of these sources defend even this measure, except by reference to prior usage. It’s one of those numbers that has taken on a life of its own.
I don’t doubt that property prices are a real problem for many families, either locking them out of home ownership or causing them financial difficulties with big repayments. But to say that more than a quarter of households are suffering financial stress because they are paying more than 30% of their income in morgtage repayments is rather like the familists saying work and life are out of balance because someone in the household is working 50 hours a week – it is assuming that there is a correct balance between life priorities, rather than assuming that people make the trade-offs that suit them best.