While the Global Financial Crisis (GFC) taught many home owners to be more conservative with their wealth, Australia’s property investors are understood to be borrowing even more against their property’s equity, which could have an impact on the wider economy if the market shifts.
A new report from Australian Housing and Urban Research Institute (AHURI) investigated the consumption habits of Australians before and after the GFC, and found that results differed based on age, level of debt, and whether they were owner occupiers or property investors.
According to the AHURI research, increases to house prices can correspond with increases to the perceived wealth of property-owning households. This can in turn lead to increased household expenditure, partially fuelled by increasing housing equity allowing home owners to borrow more against the value of their property.
The report found that before the GFC in 2003, an increase in house values of $100,000 would typically be associated within an increase in average consumption between $1000 (for old aged households) to $1700 per annum (middle aged households). However, after the GFC in 2009, similar house price rises were associated with increased consumption for old and middle-aged households of approximately $600 to $1600 per annum respectively.
Similar trends were found for households who borrowed with a high Loan to Value Ratio (LVR). While these households were more likely to consume more in response to house price increases pre-GFC, this was not the case post-GFC.
The biggest split from these patterns were found when comparing owner occupiers to investors. For owner occupiers, a $100,000 increase in house prices was associated with growth in consumption of $1700 pre-GFC and $1500 post-GFC. But for investors, similar growth in house prices was associated with consumption growth of $240 pre-GFC and $2800 post-GFC.
According to AHURI:
Since the GFC, households borrowing to finance a home solely to meet their own housing needs are less likely to withdraw their equity to finance consumption.
On the other hand, the consumption behaviour of households borrowing to expand their housing portfolios beyond their own home have the potential to have a greater impact on the macroeconomy in response to wealth shocks because of their greater responsiveness to these shocks.
AHURI goes on to describe how investors increasing their level of debt in response to house price increases could be at greater risk of significant losses if prices crash or interest rates rise, and proposes the introduction of appropriate prudential regulations:
Despite the large benefits of having a flexible mortgage system that allows households to borrow against their housing equity, this highlights a potential cost of such a system. In a number of countries with similar situations, regulations have been implemented to limit the growth of household indebtedness and the need to ensure robust prudential regulation remains an important policy priority.