Canny Australians build a bulwark out of housing debt

Wed Apr 16, 2014 11:36pm EDT
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By Wayne Cole

SYDNEY (Reuters) - The adage "safe as houses" has been an oxymoron since the global financial crisis. But it still has a resonance for Australians who use their homes as a piggy bank, salting away money by paying down their mortgages at a breakneck pace.

It's a distinctive feature of the Australian housing market that gives borrowers a vital buffer should the economy take a turn for the worse. It is also a major reason policymakers have been sanguine about a run-up in house prices that some worry could morph into a bubble if left unchecked.

Speculative froth in property is not hard to find. A tiny 15 sq meter (161 sq ft) studio apartment in inner Sydney recently went for A$220,000 ($205,800), or A$14,666 per sq meter - not far off Manhattan heights.

Home prices are up almost 11 percent in the past year, and 15 percent for Sydney, when Australian homes are already ranked among the most expensive on the planet by some measures.

Yet the talk of bubbles belie years of sober saving by borrowers who have built up sizable equity in their homes by paying down their mortgages at an accelerated pace.

"It's a huge advantage for the market," says Michael Workman, a senior economist at Commonwealth Bank, who estimates 70 percent of borrowers across the four major local banks are ahead on their mortgages by at least 10 months.

"To be a genuine threat, rising home prices need to be driven by leverage, and that's just not happening while so many are ahead on their debt."

Australia is unusual by global standards because around 85 percent of all mortgages are at variable rates and, unlike fixed rate loans, there are no penalties to paying off early.   Continued...

A tradesman uses a hammer on the framework of a new house on the outskirts of Melbourne August 3, 2010. REUTERS/Mick Tsikas