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Mortgage stress rising. Rent or buy?
By Tammy Barton

Money Management for Home Choice60 Minutes recently screened a story (‘The Big Squeeze’) about the rising rate of mortgage stress in Australia. The dream of owning a home has turned into a nightmare for many families who are being crippled by their mortgage payments.

Home ownership has become an impossible dream for many Australians. Through the 1950s to 1980s, the average house price was approximately three times the average yearly wage in Australia. Today it's about seven times.

Relaxed credit standards before the global financial crisis led to many Australians committing to large mortgages. It also became common for home owners to rack up additional mortgage debt—some as much as $100,000—towards renovations, furnishings, cars, holidays and consumer goods.

Add tenuous job security in testing economic times and we have perfect conditions for mortgage stress.

Lifelong renting is considered the norm in many other countries, whereas in Australia it has traditionally been seen as money down the drain. But astronomical house prices and job insecurity is transforming that perception. Renting is fast becoming a better option for many Australians. Here’s a real life example:

Jenny pays $590 a week to rent a family home worth around $700,000 in a metropolitan seaside suburb of Adelaide. Her landlords, Alex and Ros, pay a mortgage of around $1000 per week. Jenny, therefore, is living in a lovely home in a great location at only 50 percent of the mortgage cost. She isn’t experiencing any capital growth on her rent money, but neither are Alex and Ros due to a stagnant property market. In fact, according to real estate data, average house prices in this suburb are running at minus 12 percent for the year.

Alex and Ros must contribute $27,000 a year just to meet the gap between rental income and mortgage costs, not to mention council rates, insurance and maintenance costs. (For simplicity, let’s leave tax implications out of it.) For capital growth to cover the gap between rental income and mortgage costs, the property would need to increase in value by at least 3.83 percent in 2011. If anything, however, Alex and Ros’ house will go down in value this year.

Historically, rising property prices in Australia have made real estate investment and home ownership attractive, but that logic is changing. Home ownership may no longer be the low-risk, sure-bet speculation we used to think of it as—especially not for people who experience income fluctuation or job insecurity.

What else could Alex and Ros do with $27,000 a year? How else could they be investing that money? Bank term deposits, for example, are currently returning around six percent per annum. On the other hand, my good friend and property valuer, Kofi Adih, reminds me that you can’t put a dollar value on the benefits of living in and enjoying your own home.

If you’re planning to buy:

  • · Anticipate all of your costs. The price of the property is only part of the equation—you must also factor in stamp duty, mortgage insurance (if applicable), home and contents insurance, legal fees, bank charges, and moving costs.
  • · Don’t over-commit yourself—create a budget that anticipates interest rate rises. Will you be able to afford your loan payments if interest rates go up?
  • · Get ahead by paying more than the minimum required installment on your loan.
  • · Do your research—understand that property investment is a long-term proposition.

If you’re planning to rent:

  • · Don’t be seduced into renting a home which is more expensive than you need.
  • · When you’re renting, saving becomes even more important because you aren’t developing any equity in the property you’re living in. Saving requires financial discipline which only comes through budgeting.
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