Housing induced risk to economy as household indebtedness rises

first_imgBefore the GFC, for every $100,000 increase in house values, old-aged households spent $1,000 per year, which dropped to $600 a year post-GFC.NEW research has warned that the house-price induced debt was now a risk to the Australian economy to the tune of hundreds of millions of dollars.The warning came of research from the University of Sydney looking into housing prices, household debt and household consumption for the Australian Housing and Urban Research Institute (AHURI).“The take-up of further mortgage debt among highly leveraged households through the ‘collateralisation effect’ exposes those households to the risk of significant losses if house prices fall or if interest rates increase. This, in turn, may pose a systemic risk for the macroeconomy,” said the report which was written by University of Sydney’s Kadir Atalay, Stephen Whelan and Judith Yates.Associate Professor Whelan said the findings were relevant for macro-economic stability.“Financing higher consumption through taking debt among highly leveraged households exposes those households to the risk of significant loss if house prices fall or if interest rates rise,” he warned.More from newsMould, age, not enough to stop 17 bidders fighting for this home4 hours agoBuyers ‘crazy’ not to take govt freebies, says 28-yr-old investor4 hours ago“This is in contrast to a general belief in Australia that debt is held by those most able to service it, namely, higher income and higher wealth households.” Researchers warned that in other countries regulations were implemented to limit the growth of household indebtedness.The researchers warned that macroeconomic policymakers needed to acknowledge those potential risks.“Despite the large benefits of having a flexible mortgage system that allows households to borrow against their housing equity, this highlights a potential cost of such a system. In a number of countries with similar situations, regulations have been implemented to limit the growth of household indebtedness and the need to ensure robust prudential regulation remains an important policy priority.”According to the research before the GFC, for every $100,000 increase in house values old-aged households spent $1,000 per year while middle-aged households spent $1,700 more annually. Post-GFC, those figures dropped to $600 for old- and $1,600 for middle-aged households.“The significance of this is seen if we consider there are 1.69 million households aged 65 and over who are homeowners, then just $400 less being consumed each year by each household means a loss to the economy of approximately $608 million when compared to pre-GFC household consumption.”The report also warned that investors with mortgage debt were not as risk-adverse as other homeowners – something would need the attention of policymakers.last_img

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