Market Watch: Sydneysiders to face risk as affordability slips

A new report warns affordability for housing has eroded in Australia's two biggest cities... RBA: Aussies taking advantage of low interest rates... Reverse mortgage scheme ‘key’ to pension reform...

Market Watch: Sydneysiders to face risk as affordability slips
Sydneysiders to face risk as affordability slips
Affordability for housing has eroded in Australia's two biggest cities during the past year, as house prices rose sharply while wages remained flat, according to a report from ratings agency Moody’s warns Sydneysiders living in two-income households are spending 35.1 per cent - or more than a third of their income - on mortgage repayments, while Melbourne households are spending 28.2 per cent, Moody's Housing Affordability Measure found. Sydney households with only one income earner would be spending more than 70 per cent to pay the mortgage, which is not sustainable, Moody's says, and could cause future problems for Australia’s housing industry. The report also alleges less affordable mortgages increase the risk of default and delinquency, which could cause these risks will grow when interest rates rise from their current low, which is not expected for at least the month of May. The average standard variable mortgage rate currently sits at 5.65 per cent, but the 10-year average is 7.18 per cent, according to agency statistics.

"The larger loan sizes and repayment obligations of new mortgages in Sydney and Melbourne are especially problematic since these mortgages are being underwritten at historically low interest rates," the report said. "Borrowers who took out loans at historically low interest rates are at a greater risk of not being able to afford repayments when interest rates eventually rise."

RBA: Aussies taking advantage of low interest rates
According to reports from the RBA, Aussies have been exploiting record-low home-loan interest rates to surge $212 billion in front on repayments — a reported extra $26 billion compared to just two years ago. What’s more, the “mortgage buffer” has risen to 16 per cent of outstanding loan balances, which is up from 14 per cent in 2013 and 11 per cent prior to the Global Financial Crisis, according to Australian Prudential Regulation Authority data. Figures from the nation’s second-largest lender Westpac reveal just how widespread the trend has become — the proportion of customers ahead of schedule has jumped from 59 per cent in 2012 to 73 per cent in late 2014, according to an article from Making bigger than necessary repayments reduces the term of a loan and therefore saves interest, Australian Bankers’ Association chief executive Steven Munchenberg said. “A lot of people who are getting ahead now are going to be well placed when rates start going up. It’s smart,” he said.

Reverse mortgage scheme ‘key’ to pension reform
According to the latest Intergenerational Report, pensions are the single largest expenditure of the federal government, costing $42 billion a year, and industry vets are calling for reform. The latest Intergenerational Report predicts an almost fourfold real increase in expenditure under current pension policy by 2055 and professionals are calling for reform not just because of its current and future cost, but because the means test creates perverse incentives to over-invest in housing. Despite the request for reforms, an article in the Australian cites that the reforms should not punish pensioners for saving or for owning a home, as seen with the government’s backlash from the government’s pension freeze proposed in last year’s budget.

“The best way to do this is to unlock the approximately $625bn pensioners have in home equity," according to the Australian.

“First, government should include the home in the assets test to better align the pension means test with actual net worth. Second, the government should encourage pensioners to convert some of their home equity into income via a reverse mortgage — which allows pensioners to receive a steady income stream, similar to a pension, but financed by the value in their home.”