No easy solution to our love affair with debt
The average outstanding home loan across all Sydney mortgage holders, excluding investors, now stands at $365,873, the Sun-Herald has revealed today – and that will seem conservative to many. That’s a lot of money for a family to repay, on top of the childcare costs and potential private school fees.
So why are we burdening ourselves with so much debt? Perhaps it’s a lifestyle choice: to climb the property ladder and get one rung closer to that dream home, near a good school, with bedrooms for all the children, storage for the cot and a bit of lawn for the dog.
Household debt is growing – perhaps in pursuit of the dream family home, with rooms for all the children and a lawn for the dog.Credit:Shutterstock
Perhaps it is because we see property as the only way to grow our wealth. Wage growth might be stuck at a dismal 2.2 per cent a year but Sydney house prices have risen by 68 per cent in the past 10 years, despite the brief downturn. That seems like a tidy profit, although it's only really one when you sell up and miraculously find somewhere to live that doesn't cost you anything.
Perhaps we’re borrowing just because we can. Lower interest rates and relaxed lending criteria have enabled borrowers to take on bigger debts.
It’s not exactly the outcome the Reserve Bank is looking for. By cutting interest rates, it hopes to persuade frugal households to spend a bit more. This gives a boost to businesses who can then employ more people and provide the wage rises needed to sustain further spending growth.
But if you’re not sure your boss is going to give you a pay rise, you’re more likely to hold on to your earnings and plough any interest savings into your offset account, to make sure you can afford those future school fees and renovations.
By helping existing borrowers get ahead on their debts, rate cuts do, in theory, bring forward the day these households will be comfortable spending again. But by enabling newer borrowers to saddle up with massive mortgages, which in turn fuel home price gains, lower interest rates create a new structural risk to the economy. Reserve Governor Philip Lowe warned as much last week. To stop a dangerous build-up in debt and home prices, other policymakers must come to the party.
The Australian Prudential Regulation Authority could tighten lending standards again and make it harder to borrow money for property. That would encourage people to invest their cash elsewhere and keep a lid on property prices.
The federal government could make property less enticing by ditching negative gearing and the capital gains tax discount for investors – although neither of these measures would do much to dissuade mums and dads from piling their cash into offset accounts or buying a bigger house. The main political parties don't have much appetite for the measures either after Labor tried and failed to sell a watered-down version to voters before the election last year.
State and federal governments could encourage consumer and business confidence by showing stability and leadership in the face of threats like bushfires, floods, and coronavirus. The ANZ has predicted that coronavirus will knock 0.5 percentage points off economic growth this quarter, while last week Lowe called for greater policy certainty on renewable energy, to fuel investment in this sector. Cutting corporate tax rates would also encourage businesses to invest in Australia and hire more Australians – pushing up wage growth.
We need to consider all of these measures if we are to move our nation's cash out of property and offset accounts, stimulate the economy and narrow the gap between the haves and have-nots. Let's be honest. If you're a homeowner in Sydney with a monster mortgage and you find yourself with extra cash, no guesses where that money is going – unless you feel confident enough about your future earning power, and the economy, to spend or invest it elsewhere.
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