The Great Australian Nightmare

This country has always had lots of space.

What contemporary Australia never has enough of is time. We are working harder and longer, and complaining about lacking time more than anything else. Australia has been said to hold the doubtful distinction of being the only high-income country in the world frequently to combine long working hours with after-hours work on weeknights and weekends. And now homebuyers need even more time to work for the income to pay off the crippling mortgage on the house which they don’t spend enough time in because they never have time.

Luckily, we have big houses. What we lack in time, we make up for in space. Our pools are bigger, even though there’s less time to swim in them; our kitchens are bigger and flashier, even though the surveys say we never have enough time to cook in them. Our home theatres are huge, even though we don’t have time to watch anything in them. Through our lifestyles, we trade off time for space.

We’ve become accustomed to such trade-offs: the housing affordability index at a record low, levels of household debt at an all-time high, increasing numbers of people using credit to service ever bigger and more spacious houses with ever larger mortgages, and more people with second and even third homes – on the beach, in the country, close to the ski slopes.

Home ownership retains its dominant position as the centrepiece of a set of arrangements underpinning an established agreement between citizens and governments both in Australia and around the world. The almost totally guaranteed slice of votes from satisfied home owners has become so valuable (indeed, invaluable) in electoral terms that it’s worth more than all that lost or forgone taxation revenue used to prop it up. This arrangement is at the heart of what economist J.K. Galbraith called the ‘culture of contentment’ – home ownership is used to compensate for almost everything else.

But many of us are beginning to question this culture of contentment. And some of us are not just asking about the values of this culture and its wider consequences, but whether it’s really that contented at all.

In the United States, as in Australia, the growth in home ownership and the residential mortgage market over the last decade has been huge. A whole new range of mortgage products, including ‘no doc’ and ‘low doc’ mortgages and different types of ‘teaser’ and ‘honeymoon period loans, have come on to the market. Government-sponsored mortgage giants like the ill-fated Fannie Mae and Freddie Mac — established to feed the low-income end of the housing market — played an important part in revolutionising the provision of home finance. New types of mortgages and the new, aggressive brokers together brought the possibility of buying a house within the reach of those who’d long been shut out of home ownership.

This is the subprime mortgage market — lending to people whose income is too low, insecure or risky to qualify for an ordinary mortgage.

Subprime borrowers eventually accounted for one in five new mortgages in America. When property values were up, the subprimes weren’t a problem, but when mortgage rates started to rise and house prices started to fall, the market moved swiftly from downturn to crisis. As one of the many American economists forecasting a long and painful correction, James Galbraith (son of J.K.) noted, the debt-driven boom was in reality based on ‘dreams, illusions, and mortgages.’

There is growing evidence that the Australian housing boom has been fuelled in a similar way. Fast and loose money washing into the household-finance sector flowed too freely via fee-hungry brokers to households seduced by the prospects of easy wealth gains.

The newer mortgage-broking houses steered increasing amounts of international finance into the housing market through the use of complex mortgage-backed securities. Capital moved from bonds to property like never before, and the popularity of mortgages with financial institutions transformed housing investment. New and largely unregulated non-bank lenders or non-authorised deposit-taking institutions like RAMS, Aussie Home Loans, Wizard Mortgages, Liberty Funding and Bluestone Mortgages now competed with the banks by offering all sorts of new ‘no frills’ mortgage products, refinancing schemes and ‘non-conforming loans’ for people with poor credit histories. Some of the banks responded by liberalising their lending policies in this new free-for-all environment of competition and cheap credit.

Selling the most sophisticated of financial products to the most vulnerable households came at the end of two decades of financial deregulation, which was also a period of rapidly rising housing expenditure. Between the 1950s and 1970s in the English-speaking countries, housing overtook food as the largest single expenditure for the average household. With the deregulation of the financial markets, and with mortgage lending more competitive than ever before, home loans naturally became more widespread.

The borrowing capacity of households also increased enormously. In Australia average earnings had risen, while home loan interest rates had halved, falling to historic lows. The maximum amount a ‘typical couple’ could afford to borrow under standard lending rules jumped from $135 000 in 1992 to $305 000 in 2006. And the more housing finance that typical borrowers could borrow they did, and then some.

Rising house prices soon overtook rising incomes, borrowing capacity and purchasing power. The cost of housing rose to the extent that a double income was not only desirable but pretty much essential if you wanted to qualify for a mortgage. At the same time, as the amounts home purchasers had to fork out rose higher and higher, the level of household savings moved in an equally dramatic way in the other direction, plummeting well below zero.

The consequence is that record numbers of both overstretched home-owning and renting households now struggle with debt and housing stress. Growing numbers are unable to enter the housing market while, an occurrence without precedent in postwar Australia, many others are falling out of home ownership. The incidence of loan arrears, mortgage defaulting and house repossession has risen dramatically. This is the move from boom to bust, and more than dreams end up being shattered.

In some outer suburban areas, the cycle of mortgage defaulting, foreclosures and inevitable home repossessions has already begun. As one real estate agent in southeastern Queensland put it when advertising a mortgagee sale: ‘Owner’s pain = Your gain.’ In New South Wales, Supreme Court figures show that the number of recorded defaults rose by 59 per cent between 2004 and 2005, and by 10 per cent between 2005 and 2006, to reach a worrying total of 5368. The number of court applications involving lenders seeking house repossession also climbed steeply, rising from 2357 in 2005 to 3935 in 2007, an increase of almost 70 per cent.

Luckily, court actions do not always lead to house repossessions; lenders and borrowers can sometimes renegotiate the terms of the loan or organise refinancing or the sale of the property. But in other instances the lender can organise repossession, typically by evicting the occupants and changing the locks. In early 2008, the NSW Sheriff’s Office reported a rise in repossession activity and had begun a recruitment drive, hoping to increase the number of sheriffs struggling to keep up with the extra work across the state. Real estate agents confirmed the rise in activity over 2007 and 2008, describing ‘lock outs’ and repossessions.

Financial counsellors have begun to refer to debt-ridden, over-extended homeowners as the ‘new poor’. While the exact number of defaults and mortgagee sales nationwide is impossible to gauge, mortgage stress and house repossessions have become pressing social issues. They Still Want to Take Our House, a report by the ACT Consumer Law Centre, found that the rate of court applications for repossession increased in several states between 2004 and 2006. This report also outlined concerns about the over-representation of non-bank lenders in home repossession cases, the rising level of payment arrears for non-bank loans, and the links between debt refinancing and mortgage defaulting.

When the banks or the lending institutions foreclose on loans, households often face the dismal prospect of having to sell in a falling market, a buyer’s market. It has been estimated that across Sydney as many as twenty homes a week went under the hammer as mortgagee sales in late 2006, with many not even recouping their reserve price. One real estate agent estimated that nine out of ten auction sales in western Sydney in 2006 were the result of mortgage defaulting and foreclosures. Another claimed that he’d repossessed more properties than he’d sold.

Homebuyers who had pushed affordability to the limit and then were forced to sell their homes described losing everything, their dreams wrecked and hopes destroyed. Many lost their homes, their savings, and were still in debt. For these families, home ownership ended up being not a dream, but rather, as housing historian Jim Kemeny once called it, the Great Australian Nightmare.

As is always the case in a free market society, though, when someone’s dream shatters others more fortunate come along to pick up the pieces. Property investment companies have emerged to capitalise on the bust, buying up ‘bargain’ properties which homeowners have been forced to sell. Some groups operate weekly property tours of poor suburbs and mortgage belt areas, buying up ex-Housing Commission properties and family homes for investors. Ironically, these investors themselves take out loans, finance that the investment company itself provide, to which are added a finder’s fee and a fee for organising the renovations inevitably required for the mostly rundown houses in the poorer suburbs.

The profits the property investment companies make from scavenging cheap real estate result not so much from buying and selling the properties but from the finance onsold to the hopeful investors. In the majority of cases, the sale is pretty much irrelevant. The real money lies in the fees on the loans taken out by the aspiring investors, many of whom, in a climate of rising interest rate rises, soon face the prospect of finding themselves in exactly the same position as the families and households whose homes they’d picked up for a song.

In 2007, after financial institutions and consumer advocates raised concerns about predatory behaviour of lenders, and the lowering of credit standards more generally, the House of Representatives Standing Committee on Economics, Finance and Public Administration launched an inquiry into home loan lending practices. Although the Committee found that loan arrears and mortgage defaulting rates remain low in Australia by international standards, it reported ‘an increasing number of cases where lenders and/or brokers are engaging in predatory behaviour aimed at taking advantage of vulnerable borrowers’. It also recognised that there were very few controls on the conduct of mortgage brokers, concluding that ‘a new approach to credit regulation is needed’.

So, perversely, a considerable volume of heat in the housing market was one result of the surge in the value of homes in the first years of the 21st century. Meanwhile, blinkered politicians and economists continued to marvel at the beauty of competition, the economic miracle, and the household wealth-creation of the ordinary Australian. International observers remarked on Australia’s AAA credit rating, its low interest rates, and its powerful, Energizer bunny-like economic performance — but they also observed the country’s house-price boom and debt levels, which were ‘the very definition of a bubble’. In 2004 The Economist found that Australia’s consumers were dangerously exposed to high interest rates and even recession, concluding that the ‘biggest risk to Australia’s economy lies in its housing market’.

We continue to skate over thin ice nonetheless, and borrowing for housing continues as strongly as ever. Young families and aspirational households remain keen to jump on the housing escalator and trade up, while baby boomers continue in their addiction to borrowing against their equity to fund lifestyle and consumption wants such as holidays and home renovations. Reverse mortgages still prove popular with older Australians.

By the end of 2007 there were an estimated 31 000 reverse mortgages, worth $1.8 billion. This desire on the part of homeowners to cash in every last cent of equity from their houses is without precedent, another of the quirky features of the age. In the decade leading up to 2006 households borrowed against the stock of housing to fund non-housing spending, steadily withdrawing their equity, whereas in previous decades they steadily built it up.

What’s both surprising and disturbing is that despite historically low interest rates the credit revolution and bigger houses, the home ownership rate has not increased substantially. Extensive improvements in the availability of finance may have resulted in a unique opportunity to extend home ownership to groups who’d usually found it out of reach. However, the stability if not the actual decline in the home ownership rate suggests that the increased availability of credit was largely nullified by house price inflation, simply capitalised into soaring house prices rather than leading to a wider and fairer spread of owner-occupation.

For both younger people and low-income households it is now increasingly difficult to step onto the property ladder and enjoy the benefits that homeowners take for granted. What they’re discovering is that while there may still be a property ladder, the lower rungs have been removed. And as the Australian housing market now reacts to higher interests rates and international market pressures, some borrowers are finding it harder to hold on to the dream of home ownership.

This is an edited extract from Renovation Nation by Fiona Allon (UNSW Press).