Home Mortgage Dangers !

Interest rates in Australia are at a record low and the indications are that they may edge even lower. As a result, the banks are awash with very cheap money.  The interest customers receive from term deposit is hovering just above two percent and looks certain to retreat even further and the government is crowing that this market opportunity is now attractive for first home buyers.

That depends entirely on whether the present retreat in house prices is a lasting correction or if the stimulation of new people entering into the market sets off a new wave of inflated price movement with little relevance to the wage structure.  The banks are indicating easing the tests they apply to determining if applicants have the financial strength to service their home mortgage applications.

We could be about to see a new wave of first home buyers with very little actual equity in the house or unit they have contracted to own, and with a dismal number of years of remaining mortgage payments.  We live in a very uneasy world with various flash points ready to erupt and not the least the expectation of a tariff war between America and China bringing trade to a halt.  The unrest in the Middle East is far from settled and now there are new tensions in Europe that are edging towards an oil tanker war.

Even if these tensions remain under control the history of world finance is beset with cyclical minor recessions.  We are accustomed to stock market prices dropping as a result of rumours which lack substantiation, as happened in 2008.  We would do well to remember what happened to the housing market at that time.

A price panic caused buyers to retreat and home and unit prices dropped sharply, leaving many people owing more on their mortgage than their asset would attract from the diminished pool of buyers.  The banks were quick to foreclose delinquent mortgage payments and it was very evident that they had little expertise in moving the homes that came under their direct control.  Lawns were left uncut and the appearances deteriorated.  Former owners lost a lot of money in that bad experience.

There is the expectation that this drop in interest rates is an anomaly. We may be enticing many first home buyers into financial ruin.  Sooner or later the market will stabilize and rates will rise.  What we do now will have a dramatic effect on house price stability when that inevitably happens.  A rise in interest rates will require mortgage holders to increase their repayments and many mortgaged  owners will be left stranded.   We may be enticing many first home buyers into financial ruin if we allow them to enter the market at payment levels they can now barely afford.

At best, making it easy for first home buyers to enter the market will merely restore housing stock prices to an unsustainable level.   That will keep bank profit levels high, but at a future cost to the over committed.  Many young people are better served by remaining in the rental market rather than taking the risk of jumping into a market that lacks stability.