The great mortgage stress myth: We're paying off our homes faster

By the reaction in the media, yesterday's rate cut by the Reserve Bank is the greatest thing since, well, the last rate cut 31 months ago. It's going to boost retail, housing and even Christmas. Truly a miracle.

Yet all this reaction, and that on TV and radio yesterday and this morning, completely misses several important points.

The first is that the rate cut will cause the banks to cut their deposit rates, meaning savers will have less income, especially those who depend on fixed income from bank term deposits, such as pensioners and superannuants.

Secondly, the cut will, if it sparks a halt to the current slide in housing prices across all capital cities (they fell 1.2% in the September quarter, according to the Australian Bureau of Statistics and 2.2% in the 12 months to the same quarter), then house prices will start rising, thereby ending the small improvement in housing affordability we are currently witnessing.

But more importantly, the group of people who will get relief from the lower cost of their housing and other loans is much smaller than you thought.

If only our pundits in the Fairfax and News Limited press, plus the ABC, had read the Reserve Bank's Financial Stability reports, such as the second one for 2011 released in late September they would have found something to their interest, and changed their reporting yesterday and today.

Put simply, many Australians are deleveraging and saving more. The higher savings are well known, but not too many of our pundits have bothered to think about how that is being achieved; it is not just a case of saving more money in their accounts ($12 billion extra in September)

Australian mortgagees are repaying more than the minimum on their housing loans, and credit card holders are also repaying their credit card loans faster than they have to. As the RBA explained in the September Stability Review:

"Contributing to the slower pace of debt accumulation, some households are saving more by choosing to pay down their debt more quickly than required.

"Net repayments on credit cards have picked up in recent months. Many housing loan borrowers have continued to make substantial excess principal repayments, even as higher interest rates have raised required interest -- and thus total -- repayments.

"The average excess repayment is currently equivalent to around three-quarters of the scheduled total (principal plus interest) repayment. Consistent with this tendency to pay debt ahead of schedule, surveys have shown that a high share of households consider repaying debt to be the wisest place for savings.

"Households that make excess repayments on their home loans generally build up buffers that they can draw down in the future if required. This should be regarded as a positive development for the resilience of the sector. These shifts in saving and borrowing behaviour have in part been enabled by a favourable labour market and solid income growth.

"Growth in gross income therefore outpaced the impact of higher interest payments, such that growth in real disposable income per household (after interest payments) also strengthened, to 3.3 per cent over the year to the June quarter, up from 2.3 per cent over the year to the December 2010 quarter.

"This increases the resilience of households to shocks, relative to countries where it is less common to do so. As well as providing a cushion against changes in borrowers’ financial circumstances, excess repayments increase the distance between the remaining loan balance and a property value that could be lower in the future, making negative equity positions less likely."

These trends are also ignored by the same writers when they warble on about the rising level of mortgage stress. Mortgage stress has always been with us, no matter the state of interest rates; some people who have lost jobs, seen pay cut or are starting out on the home buying treadmill feel it more than others.

But how can mortgage stress be a problem when a large proportion of people with mortgages are paying off those mortgages faster than they can? In other words, they are paying back more than the minimum, which is always recommended by advisers because it builds up buffers and reduces the principal faster than it would normally be reduced.

The fact that Australians with mortgages are repaying their loans faster is also ignored by the doom and gloomers who predict a nasty fall in property prices and a re-run of what we have seen overseas. They include Professor Steve Keen.

And finally, the most desperate piece of marketing came from Fairfax property website Domain, which sent this email to registered users yesterday afternoon:

"This fall in rates will be greatly appreciated by households as it will put an extra $60 into their pockets each month," said Domain property expert Carolyn Boyd. Talk about desperation.

The reality is that most mortgage holders will simply leave their payments unchanged and effectively repay their loan by an extra $60 a month or whatever the saving is on their mortgage.

This article originally appeared on Crikey.