How ’stressed’ are households with mortgages?

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.

23 thoughts on “How ’stressed’ are households with mortgages?

  1. I was told that one needs a combined income of 150K to buy the average home in Sydney now.


  2. I don’t know what financial institutes they are talking about — At least in my case, the impression I had got was that most seemed quite happy to lend me as much as I could possibly want — overly happy in fact — I would get emails telling me how much I could potentially lend, and the interest on these numbers would take up more than 70% of my after-tax income. Perhaps they were banking on me getting a pay rise, finding a rich girlfriend, or something else. Indeed, with some lenders, I had the opposite problem — some institutes have quite large minimum amounts.


  3. Conrad – I think now financial institutions are perhaps too willing to lend, and this is seen in rising bankruptcies, but banks used to have far stricter lending criteria – and maybe old rules have simply been passed down into social science without anyone going back to check whether they are appropriate or not, and then even the caveat about lower-income earners being lost as newspapers simplify and pollies point score.


  4. Thanks for offering some clarity on this Andrew. Peter Costello today made the point that some of those people with high morgage repayments own multiple houses. I suppose that is merely another example of higher housing consumption.

    The ALP seems to be making much of the “morgage stress” headlines for quite obvious political reasons. However I have not heard any articulation of a remedy. What are they proposing?


  5. With the increase in house prices across Australia, the average home owner is going to be something that people will only think about in time to come.

    More young people are resorting to Investing in a property and renting with friends or are staying with the mum and dad.

    I did an example of what would happen if a person either purchased his own own or invested in a few properties and on the average the person that invested had over $500.000 better off and didnt struggle through the 10 year period trying to pay off the home.

    When I sit with clients that are looking at Investing in property my main concern is the cashflow. And as I promote on my website .
    “If you can comfortable invest then do it, if you cannot then don’t”

    I guess the Government can always allow home owners to claim against their taxable income for the interest payments made on the home loan. Isnt the Government making a percentage of all loan payments?

    If they really did care about the home owners why don’t they help in this way, if they were serious?


  6. Yes, borrowing a lot could simply be a trade-off people choose to make. But even if people are under genuine financial ‘stress’ due to taking on large mortgages, is this a policy problem? With gross rental yields at about 4% in most capital cities and lending interest rates at over 7%, people can rent much more cheaply than they can buy. The fact that people buy is primarily a decision based on emotion and investment preference rather than on the need for accommodation. Who is going to come to my aid when my shares in XYZ mining company collapse?


  7. Andrew Norton wrote:
    maybe old rules have simply been passed down into social science without anyone going back to check whether they are appropriate or not, and then even the caveat about lower-income earners being lost as newspapers simplify and pollies point score.
    This seems right to me. The stress indicator probably isn’t all that reliable because it looks like it’s drawn from older numbers used to calculate probable rates of default. Mortgage lenders generally toss a whole lot of variables into a magic formula to determine whether you are likely to default on your home loan and how long that process might take. I can’t find many published references but here’s what I remember from skimming over the code of one of these systems:
    – percentage of income to mortgage payment is a poor predictor for default rate of high income households but gets more accurate for low income households i.e. there is a kernel of dough you need to survive, after which you can spend as much on housing as you want without running into risk of default. Back in the 1960’s the cut-off for reasonable lending used to be 25% of your income and the banks wouldn’t even look at you if you exceeded that. Now it’s a lot more liberal and correspondingly complicated (location of house being taken more into account for example).

    I don’t know whether risk of default is correlated to stress (I suspect it might be – most people from memory pay their mortgage and groceries before their electricity bill if they have a cashflow problem and this would cause them some concern).

    So, as a blanket statement (30% of mortgage payers in stress) it’s absolutely dead wrong. As an indicator that there are some real issues with housing affordability for low income earners, it might be valuable but nobody is making that distinction. As a mechanism for headline grabbing, it’s very effective.


  8. Andrew they are called low doc loans and the loans are sometimes 105% of the value.

    It doesn’t matter what sort of loans they are if people are being stretched they do not like it which is one of the major reasons for the opinion polls.


  9. You keep saying that Homer, but it can’t explain why the polls turned suddenly and dramatically. In the Newspoll this morning, the biggest drop over time has been in the over-50s, the group least likely to face any mortgage problems. And there is nothing showing in the standard of living Newspoll to suggest that unusual numbers of people think they are going backwards.


  10. Andrew Norton wrote:
    And there is nothing showing in the standard of living Newspoll to suggest that unusual numbers of people think they are going backwards.
    Empathy voters. I’d like to see a poll that asked not how you are doing, but how you perceive others are doing. I think it would explain the IR attitudes and why Labor think the housing stress angle is a vote winner. Either that or the public aren’t keen on Dollar Sweetie as their next PM 🙂


  11. David, I think that has the same problem as Homer’s argument, in that nothing new has happened since last December in policy or social or economic trends that could plausibly explain a major shift in the polls. The only difference is Rudd – yet as I pointed out in a post a few weeks ago his rating as preferred PM was much lower than Labors 2PP lead, and it has shrunk further since without affecting the 2PP.

    Labor’s talking up housing stress not beause they have any answers, but to neutralise a possible Coalition interest rate scare campaign. It’s fair enough – the two arguments are as dubious as each other.

    A poll on how other people are going would be more negative than a poll on how the respondent is going – they almost always are – but whether it would be unusually negative I am not sure.


  12. Some qualitative polling recently, from Hugh Mackay’s people and (I think) Graham Young over at National Forums, has suggested that the water crisis is the heart of the PM’s problem. That certainly did intensify over the summer and is yet to clearly turn around, despite the recent weather.
    But the polls actually began to turn sharply against the government during 2006. Labor went from around 48-49% in the first quarter to 52-53% by the final one. The ‘bounce’ to Rudd last December may have just front-loaded something that was always going to happen.
    In my opinion, a large chunk of the current 9-10% swing the polls are showing is just boredom. People are tired of the PM and interested in the ‘new’ Kevvie. Whether boredom will actually motivate people to install an unknown newbie as PM once they enter a polling booth is another question.


  13. “nothing new has happened since last December” … maybe only in WA but that’s about when house price hysteria hit the headlines. (Seemed a matter of heady pride that house prices here were about to eclipse Sydney’s). The fact that prices zoomed up so far and so rapidly in WA might be contributing to the feeling of mortgage stress here.


  14. andrew, as possum has shown the polls haven’t changed dramtatically at all, they were well in front with the Bomber then they are further in front.


  15. Homer – It is true that despite Beazley’s poor personal ratings Labor’s 2PP were in the competitive range, eg they were 51-49 ahead in the final Newspoll of Beazley’s leadership. But there has been a dramatic change since, as shown in Bryan Palmer’s aggregation of the polls. Not only is the scale unusual (1975 and 1966 are the only real parallels I can see) but the persistence of such a large lead for 7 months is unprecedented. That this is against a government that, on the conventional indicators, has the best set of economic numbers since the early 1970s, and with an Opposition leader who appears competent but uncharismatic and is not offering a substantially different set of policies, makes it all the more intriguing.


  16. actually the newspoll on the day of the leadership election was 55-45. The ALP were constantly leading in the polls now they are leading very comfortably. People perceive the ALP is better electable material now simialr to 1995. There is a definite time for a change mood which is now being met.

    most people who do the econometrics find that good economic figures are good news for oppositions whilst rising interest rates are good for Governments. It is fascinating how the figures contradict what people think is the norm.


  17. Homer – There was no Newspoll on the day of the leadership challenge. Rudd became leader on 4 December, with the next Newspoll 8-10 December, which had the 55-45 result you mention.

    Which people doing the econometrics are you talking about? Andrew Leigh and Justin Wolfers wrote a paper in 2005 which updated the only recent academic study of this that I know, which found that low unemployment and inflation favoured incumbents. I don’t recall seeing any research on the interest rate question over time, though a least a couple of papers looked at it for 2004 in terms of seats which had lots of people with mortgages and surveys in which people were asked important interest rates were. They did not come up with your conclusion.


  18. I think Homer is actually referring to the AC Nielsen poll which showed 56-44 on the weekend before Rudd became leader.

    Nielsen’s headline figure is difficult to credit from primaries of 41-39 though. 53-54% would be more plausible.

    Newspoll and ACN were a bit inconsistent during October and November 2006. ACN averaged 41-39 to Labor, News the reverse… if Newspoll had shown ACN’s numbers Bomber might have survived. Sigh.


  19. “I was told that one needs a combined income of 150K to buy the average home in Sydney now.

    Assuming the cost of money 7% that $150,000 20 years ago was around $39,000 on present value estimate.

    In that context $150,000 doesn’t seem that much.


  20. bugger me Leopold is right. My memory is howardsque.

    By the way Andrew why haven’t you looked and the link of Workchoices legislation and voting intentions..

    JC work how many people can average 75K to service a ,loan for an AVERAGE home?


  21. I have blogged extensively on WorkChoices polling (too many to link to here and at Catallaxy, put ‘WorkChoices’ in search) and at least since November 2005 I have thought it contains electoral risks for the Coalition.

    The difficulty in isolating any effect is that, as I have argued in several recent posts, direct questions about how issues affecting voting are so contaminated with answers from already partisan respondents as to be of little value, and that before December 2006 the polls were moving about in the ‘normal’ range (including the ACNielsen), despite the massive campaign against WorkChoices – probably the most expensive issue campaign in Australian history.

    It’s probably one of the underlying factors as to why some previous Coalition voters now say they will vote Labor. There are several such possible reasons. But what is interesting me here, as a student of polling, is that elections force people to bundle a whole range of pluses and minuses with the two major parties, and something important has changed in their final calculation over the last 7 months.

    The most obvious explanation is that though Rudd isn’t far ahead of Howard as preferred PM, leadership was a significant negative for the ALP, and take that out of the equation and their issue strength puts them ahead.


  22. just for the interested.
    Most people who borrow for investment loans go the interest only route with the aim of selling in the near future ie they are there for the capital value not the income. This is verified by the fact the yield on investment in housing is very low.

    People who bought at the height of the boom are simply running up and down on the spot paying off interest in the hope the price of their dwelling will rise and they can sell.


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