Wealthy become mortgage lenders darlings as they borrow to buy investment property

Australia's richest federal electorates, in Sydney and Brisbane, have been leading the mortgage binge, dousing fears that the majority of households are facing a debt crunch.

Wealthy families are borrowing against their bricks and mortar to buy investment properties, and to fund holidays or their children's education. This group, not the battlers, explains much of the drop in home ownership over the past five years, data obtained by The Australian shows.

The best example is Mitchell, in Sydney's northwest suburbs wealth-belt. It boasts the second-richest electorate by income and the largest concentration of houses with four or more bedrooms, and is the second-safest Liberal seat on the electoral pendulum. Yet the proportion of households paying off their homes has jumped from 35.4 per cent in 2001 to 46 per cent last year.

This week's release of the national census showed the share of Australian households owning their home outright crashed from 39.8 per cent in 2001 to just 32.6 per cent last year. And the proportion who were paying off their home jumped from 26.5 per cent to 32.2 per cent over the same period.

The housing boom since 1997, which has typically seen prices double as nominal interest rates have halved, has created fears about the locking-out of young families.

But new entrants to the market over the past five years facing larger debts do not account for the fall in the share of houses owned outright. It is existing owners using their bricks and mortar as a line of discretionary credit who are driving the trend to lower rates of freehold title.

"That third that have paid off their home may well be borrowing against it," federal Treasurer Peter Costello said. "My suspicion is that there are a lot of people unlocking equity in their homes, particularly amongst those older people who would traditionally have paid off their mortgage in its entirety."

Stephen Walters, chief economist at investment bank JP Morgan, said people might have expected an ageing population would mean a greater proportion of people fully paying off their homes, but more people were now prepared to be investors.

"Certainly the big change between 2001 and 2006 is deteriorating affordability. As prices boomed through 2002-03, more people had to borrow to gain a foothold in the market," Mr Walters said.

"But added to that is the changes in banking products that are allowing people to redip into their mortgages to fund things like their kids' education and go on overseas holidays. It puts off paying the final debt, and pushes up the proportion of households that aren't paid off."

NSW, which has experienced a property slump in recent years, had the lowest proportion of home mortgages (30.2 per cent) of any of the main states, the main census said. The boom state of Western Australia had the highest proportion of mortgaged homes at 35.2 per cent.
Source: The Australian