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Excessive debt caused by high property prices

12th October, 2012No Comments

The big picture

Looking at the bigger picture, Australia is one of the best places to live in the world.

A few stern words between leaders is the extent of political war, people are free to live, speak and express how they see fit and seemingly our economy is on a steady recovery from the GFC.

However if you look closer, life in Australia isn’t as glamorous as it seems.

With close to 70% of Australians claiming to suffer from financial stress, the country is crippled by excessive debt.

In fact Australia’s household debt as a percentage of disposable income is the highest in the world.

150% to be exact and it has been stuck at that figure for close to five years.

In the last 20 years that figure has increased from just 50% and interest paid as a percentage of income has doubled.

The underlying issue seems to be the high price of land in Australia.

The problem

The cost of land is among the highest in the world, leaving Aussies wanting to own their own piece of this great country with huge debts.

The median house price in 1986 was $93,000 and thanks to the rising population, a lack of arable land and artificial restrictions on residential development in cities, this figure has increased sixfold to $550,000 today.

By contrast, over the same period average household incomes have only risen 3.5 times.

With such high property prices compared to the average wage, Aussies have to take out huge loans to buy homes.

Currently banks can lend home buyers more than 90 per cent of the purchase price contributing to the excessive figured of household debt across the country.

To quell this figure, a proposition was put to the RBA to cap the amount of money banks can lend to homebuyers.

The head of the Reserve Banks’ financial stability department, Luci Ellis, said such caps threatened to make it harder for first home buyers to enter the market.

A solution?

In 2010 Hong Kong introduced a similar cap which required all properties costing $HK8 million to $HK12 million ($1 million – $1.5 million) to have loan-to-valuation ratios no greater than 60 per cent.

Dr  Ellis said overseas experience with caps on lending had tended not to control prices, but rather lower the number of people who defaulted because buyers would still have equity in their home if prices fell.

While playing down the need for caps on lending, Dr Ellis instead encouraged future homebuyers to save a deposit.

‘‘People need to provide some deposit when they buy a home. It protects them if something goes wrong for them, like a job loss or illness, especially if it happens at the same time that housing prices are falling,’’ she said.

If you are struggling with debt we can help you get back on track. Call Debt Rescue today on 1800 00 3328.