Boom In Loans From Home Equity Fuels Growth
Sydney Morning Herald
Friday February 21, 2003
The great Australian obsession with paying off the home loan quickly is waning.
Households are borrowing more against the value of their homes to fund holidays, cars and other consumer goods, according to a new Reserve Bank study.
It says borrowing secured against the family home is outstripping new spending on housing for the first time.
``This means that households, in aggregate, have been extracting some of their equity in the housing stock to release funds for other purposes," it says.
And 20 per cent of borrowers who refinanced home loans between 1997 and 1999 used some of it to fund other purchases, such as cars and holidays.
The process, called housing equity withdrawal, represents a big shift in borrowers' behaviour. Until recently, spending on new housing significantly exceeded net new borrowing for homes, leading to equity injections rather than withdrawals.
The new willingness of Australians to use their equity to get cash has boosted consumer spending and growth.
``The increase in housing prices in recent years has contributed to rising household wealth and has helped to underpin continued strength in consumption spending," the Reserve says.
But the equity withdrawal process has helped fuel a recent sharp increase in household debt, leaving many borrowers more vulnerable to interest rate increases.
But the Reserve said the equity withdrawal was not necessarily a problem because the low inflation and low interest rates meant households could service higher debt levels.
Also, rising house prices meant increased borrowings and debt have tended to be offset by rising household assets.
``A situation of net equity withdrawal does not of itself signify that household borrowing is unsustainable or that debt exposures are excessive," the report says. ``While households in Australia have been able to use equity withdrawal as a significant source of cash flow in recent years, the ratio of housing debt to assets in aggregate remains relatively low."
Interest rates on home mortgages are considerably lower than on other borrowings such as credit cards and personal loans, providing a strong incentive to use home loans to fund other activities.
``Households may also use the funds to purchase other investments such as shares, or indeed to fund equity in new business ventures," and not just consumer goods, the report says.
Housing equity withdrawal has also been growing in the United States and Britain.
© 2003 Sydney Morning Herald
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