re: don't worry, just keep borrowing From The Age.Housing loans...

re: don't worry, just keep borrowing From The Age.

Housing loans fuel debt splurge
By Josh Gordon
Economics Correspondent
Canberra
October 14, 2003

Investors continue to pump cash into real estate, ignoring predictions of higher interest rates, fears that the housing bubble is ready to burst and signs that shares are offering better returns.

Bureau of Statistics figures yesterday revealed lending to housing investors shot up by 5.5 per cent in August to a record $6.81 billion, 35 per cent more than a year earlier.

The Reserve Bank, Federal Treasury, the International Monetary Fund and the Australian Prudential Regulation Authority have all singled out the bloated housing market as a key risk for the economy.

But the warnings have been largely ignored and Australian households now owe an average of more than $130 for every $100 they earn, one of the highest debt-to-income ratios in the developed world.

During the month, total lending to home buyers reached a new peak of $18.3 billion, but a record 37 per cent of that was by investors, not owner-occupiers.

AMP Henderson chief economist Shane Oliver said the housing investment surge was "massively unsustainable", with the supply of rental properties far outstripping population needs.

"The only reason the market is going up is because investors are still piling in," Dr Oliver said. "The first home buyer is virtually priced out of the market. With rental yields very low, rents virtually stagnant and vacancy rates quite high, particularly in Melbourne and Sydney, the whole housing bubble is massively unsustainable."

Interest rates have been on hold for 16 months, but economists are tipping an increase as soon as December, and some believe rates will have risen by half a percentage point by March, taking a standard variable mortgage rate to about 7.07 per cent, adding about $32 to monthly repayments for every $100,000 borrowed.

Higher mortgage costs could be disastrous for households already stretched to the limit of their capacity to meet monthly loan repayments.

Pollster Hawker Britton yesterday warned that one in four home buyers it surveyed had said they would have trouble paying their loan if interest rates went up by one percentage point. Almost two-thirds said they would be in trouble if the Reserve lifted its official cash rate by 3 percentage points to 7.75 per cent, a moderate level compared with historical trends.

The Australian sharemarket has risen by about 22 per cent over the past six months. Despite this, investors still appear to be fixated by property.

A survey of 1200 households by investment firm ING and the Melbourne Institute found more than 30 per cent intended to invest spare savings in property, compared with 22 per cent in 2001. Only 8 per cent saw shares as the best bet, compared with 12 per cent in 2001.

Australian Prudential Regulation Authority chairman John Laker said the housing market would inevitably slow, and a "not unrealistic" scenario of a 30 per cent drop in house prices could force up to 3.5 per cent of borrowers to default on their loans.

The Reserve has delicately suggested that generous tax breaks for housing investors may be partly responsible for the debt binge.

The Government has ruled out tax changes. However, with the proportion of first home buyers at a record low, it has called on the Productivity Commission to conduct an inquiry into housing affordability.

Investors can write off rental losses against tax and pay tax on only half the capital gain when they sell. That, historically low interest rates and freer lending practices have encouraged the investment surge.