Mortgage rates, we are told, are at historical lows. And yet, according to The experience of Mortgage Distress in Western Sydney report released in June by the University of Western Sydney, some mortgage holders are finding it so hard to pay, they are reduced to eating nothing but rice.
The study sought to investigate the impact of mortgage distress as experienced by individual households. The accepted definition of mortgage stress centres on the borrower being in payment arrears of 90 days or more. The UWS study argues that this definition is not broad enough.
“Many data collection exercises are designed to monitor the effect of mortgage stress on the performance of financial products”, the study said. “Rarely do data sets capture households that regularly meet their mortgage commitments, yet find it more and more difficult to do so ...
“This unrevealed stress is vastly under explored.”
The report was based on the experiences of 33 survey respondents and in-depth interviews with 17 of those. The “sensitive” nature of mortgage stress, carrying with it feelings of shame and failure, hampered the investigators’ ability to recruit participants in the study.
The incidence of mortgage stress has been rising since around 2000, the report said. At that time, the ratio of household debt to household income reached 100%; it rose to 157% in 2008.
By far the largest proportion of that debt is housing debt.
The underlying cause of increased household financial instability, the report said, is the “withdrawal of risk protection of households” by governments. “Government was once the major protector of incomes, for example, via its administration of a system of industrial awards and by guaranteed entitlements to unemployment and sickness benefits.”
The deregulation of the labour market and the increasing “flexibility” of employment contracts has led to “a raised level of responsibility at the household scale for medical and educational needs and for superannuation savings”. Households have become financial “shock absorbers of last resort”.
Banks, governments and other financial institutions have shed much of their historical responsibility.
Buying a house is seen as a hedge against poverty in old age. “The rise in the ratio of household debt to household income reflects this perception,” the report said. Increasingly thrown on their own resources, many householders see home ownership as an economic asset – perhaps the only legacy they may leave to their children.
Of the 33 people surveyed for the study, only six had been in arrears with their mortgage payments. However, 25 of the 33 had found it difficult to make the payments.
The real story, the report found, was in the lengths that borrowers would go to meet their mortgage obligations at — even at the detriment of their health.
Hugo (not his real name) migrated to Sydney in 2003. Unable to find stable rental accommodation for his family of 14, he felt compelled to buy a home in a suburb with few services and amenities.
After a promised full-time job fell through, Hugo was left with only $200 per fortnight to pay bills and provide food for his family.
“Just semolina and rice”, Hugo told the interviewer. “If you are hungry you can eat the rice without anything ... it’s a really poor meal, poor dietary.
“But at least we are not outside.”
Other respondents were in mortgage distress as a result of a relationship breakdown, loss of income caused by injury or illness, or a combination of causes. The common experience, however, was that all made acute sacrifices to maintain their mortgage payments and keep their homes.
Those in mortgage distress were commonly burdened with large credit card debt also, often relying on the credit card to pay for essentials that they couldn’t otherwise afford. Other coping strategies include accessing superannuation savings, taking extra jobs and cutting down on essentials, such as health care.
Respondents reported that stress intensified in the three years leading up to October 2008, during which time interest rates increased by 4%.
The report concluded that the apparent health of the Australian economy emerging from the global financial crisis is only partly true.
Unlike banks, whose financial viability was underwritten by the federal government’s borrowing guarantee and other fiscal stimulus measures, “households rarely devise and enact risk management strategies. Nor are they provided with state underwriting when they are financially fragile.”
Speculation that the Reserve Bank of Australia (RBA) would raise official rates at its August 3 meeting has became muted after official inflation figures released by the Australian Bureau of Statistics on July 28 came in under market expectation.
Many people living with severe mortgage stress will undoubtedly breathe a sigh of relief that the RBA is unlikely to raise interest rates in August. However, for as long as housing is treated as an object of financial speculation; and home buyers seen as easy prey for financial institutions, the problems will continue.