Thanks to the property market, Australia is riding on 27 years of recession-free economic growth, a period which saw home values skyrocket. However, with tighter lending regulations and higher costs, will this remain unchanged? Bloomberg reports on the consequences of a perception that has been long ingrained in the minds of the citizens.
As early as the year 2000, politicians in the country introduced the “Australian Dream” enjoining Aussies to avail themselves of mortgages and invest in the property market – a sector that has always been seen as a money generator.
The government has held on to this belief and even distributed "checks" during the global financial crisis to aid buyers seeking deposits, driving economic growth higher.
Consequently, the phenomenon has reached the financial sector. "As the mining-investment bonanza to feed China’s demand for commodities started to splutter from 2012, the central bank rode to the rescue, cutting interest rates to record lows," Bloomberg said.
Those who availed of mortgages during those times often took advantage of interest-only loans so they didn’t have to pay off any of the principal for the first five years. It was well received, especially in 2015 when 46% of all new mortgages belonged to this lending program.
But now it’s 2018 and it's closing in on time for borrowers to pay. An estimated $360 billion of interest-free loans are expected to be reverted into interest and principal payments through 2021.
There is some concern over whether consumers will be able to pay off these mortgages, given tighter financial conditions and an overall slowdown in income growth.
However, the Reserve Bank of Australia remains positive and said that, according to its research, “the damage from the loan rollovers should be minimal.”
Collections: Mortgage News
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