housing affordabilityResearch released this week from the International Monetary Fund (IMF) has placed Australia’s housing market as among the world’s most unaffordable housing markets. When household incomes and rents are taken into consideration, the IMF’s figures rank Australia as third behind Belgium and Canada for ‘unaffordability’ when examining and comparing 24 countries. The survey was made as part of a move to push governments to act against housing bubbles. This is not the first time affordability has been on the radar for Australia. We look at how that might play out with lenders and how unaffordability can impact debt levels and instances of credit defaults.

By Graham Doessel, Non-Legal Director of MyCRA Lawyers www.mycralawyers.com.au.

The full story featured in the Sydney Morning Herald ‘Home Prices Outpacing Earnings: IMF’ explains that the IMF data was published in an attempt to ensure governments moved from a policy of “benign neglect” regarding house prices. The story cited IMF’s deputy managing director, Min Zhu who warned in a recent blog post that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises.

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The IMF data is the latest indication of the high cost of Australian housing, which some economists believe has started to deter buyers.

In April, Barclays economist Kieran Davies said prices were ”flashing red” with prices at 4.3 times household income and 28 times annual rent, both just below record highs.

In a sign the market might be cooling, however, capital city prices recorded their first monthly fall in a year during May, according to RP Data-Rismark. Sydney’s median house price fell 1.1 per cent in the month to $678,500 and Melbourne’s dipped 3.6 per cent to $555,000.

Australian houses have long stood out as expensive when compared with other nations. But Mr Zhu conceded that detecting overvaluation was ”more art than science” and it was important to also consider factors such as credit growth and household debt.

On this front, recent figures have been less dramatic. Latest Reserve Bank of Australia figures show housing lending growing at its fastest annual pace in three years, but it is still well below the pace reached before the global financial crisis.

Household debt as a share of disposable income is also at a three-year high, at 148.8 per cent, but remains below record highs.

In order to prevent housing markets from overheating, the IMF recommends governments consider rules to rein in riskier bank lending, which Australia has so far avoided.

Mr Zhu said more than 20 countries had adopted ”macroprudential” policies such as caps on low-deposit loans or debt-to-income ratios in recent years.

Macroprudential policies have reportedly been up for consideration by the Reserve Bank (RBA), especially since their adoption by New Zealand. Such policies may include placing restrictions on how much finance borrowers can access when compared to the value of properties they are borrowing against. In an earlier Sydney Morning Herald story, Housing affordability a challenge for RBA, investment bankers Goldman Sachs had presented research to the RBA on the benefits of macro-prudential housing policies, suggesting that the measures impact house prices and credit growth. However, RBA Governor Glenn Stevens said late last year, he did not have an “active plan” to deploy such measures at this time.

This is complicated stuff, and I am sure the RBA will be watching New Zealand closely for the impact on borrowers and affordability there.

In the interim, can banks react to reports such as this internally and adopt similar policies individually in the absence of government policy? Absolutely – and this could have been happening for some time.

We know that for many borrowers lending criteria has been fairly tight for a long time, and certainly since the GFC.

On the flip side, there seems to have been a fairly consistent requirement post-GFC for a clear credit rating in most situations. Our experiences in credit repair have seen clients who were able to raise a good deposit and plenty of ongoing income, but were still denied due to bad credit.

Considering this, I don’t see any reason why the income to value ratio requirements couldn’t have reduced internally as well.

Unaffordability and debt

The other possibility is an increased reliance on credit in place of ‘income’ amongst some sections of the population who are facing high rental and housing prices. The instances of bad credit may be higher in an ‘unaffordable’ housing market, because of this reliance on credit. This may exacerbate the problem of access to affordable housing given lending restrictions on bad credit clients amongst most top-tier lenders. So it becomes a revolving door of unaffordability for certain sections of the population.

It is interesting to note, that we don’t have figures on ‘bad credit’ or default numbers to go on to fully analyse this thought, as our credit system has only just made the requirement that this information be collated and made available – but it will be something to keep on the radar in the future in this context.

Bad credit is not always valid.

Mistakes can happen on credit reports. Likewise, bad credit in Australia can be listed on credit files unknowingly. We have a responsibility to check our credit report, but according to Veda, 80% of Australians have never done this.

They probably also don’t know that a credit listing should be tested against the appropriate legislation for its validity and its accuracy. Australians should also know Creditors have a legal obligation to remove a listing which was placed incorrectly.

With affordability so low, and the first home buyer market in crisis, education is key for every credit active individual to make best use of these changes, aware of the action they need to take to ensure their rights are upheld and their chances of home ownership are still within reach.

Find out more about credit repair and disputing a credit listing.

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