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High cost of living a threat to property owners

By webmaster
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The rising cost of living is placing an increasing strain on household budgets that should be acknowledged in banks’ lending policies, according to Merrill Lynch.

According to a recently released Merrill Lynch report, all of Australia’s banks have relaxed their lending criteria in recent months in a bid to attract a greater share of home loan customers.

The report argued that relaxed lending could put property owners into trouble, as many will be allowed to borrow more than they could possibly repay.

Merrill Lynch research analyst Matthew Davison said the strain on the household budget is too big to ignore and that banks aren’t accurately measuring household costs.

Meanwhile a report from Standard & Poor’s suggests incomes could have just as much impact on mortgage stress as the rising cost of living.

While Standard & Poor’s agreed that the rising cost of living would inevitably put greater stress on borrowers, their report found that not all mortgage stress is being borne exclusively by lower income borrowers.

“In our opinion, for middle-to-higher income earners, the income characteristics of borrowers is another key factor that may influence mortgage affordability, possibly even more so than living cost assumptions,” the report read.

The report found that any changes to income could have a much more significant impact on mortgage affordability and stress in the middle-to-higher income borrower categories than rising living and/or interest costs.

“While income growth can offset rising costs, a drop in income may put significant pressure on certain borrowers.

“For middle-to-higher income earners, we believe that the Henderson Poverty Index (a measure widely used by lenders in Australia to estimate living costs to qualify borrowers for housing loans) does not reflect these borrowers’ typical lifestyle choices and resulting costs of living.

“When qualifying borrowers, most lenders also incorporate a minimum net surplus ratio in their calculations to allow for potential escalation in costs of living and/or interest rates. Nevertheless, we have found that neither cost of living nor interest rate increases erode the net surplus ratio as quickly as a drop in the borrower’s income.”

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