Home Economics: Milk That Cash Cow For All It's Worth
Sydney Morning Herald
Tuesday June 3, 2003
Paying off the mortgage? Forget it: homes have become piggy banks as owners cash in, writes Annette Sampson.
Just 10 years ago, the ambition of most young couples was to buy a home and pay it off as quickly as possible. But Ben Kingsley, 31, and Jane Davidson, 26, have no qualms about borrowing big to fund other ambitions.
The couple, who are engaged, recently refinanced Ms Davidson's home in Alexandria. The property's value had risen from $390,000 to $600,000 since she bought it in 2001. Savings had gone into reducing the original loan and they saw an opportunity to use some of their equity to fund investment in shares, managed funds and an investment property.
``We'd obviously had a purple patch for the past two years and we wanted to ensure that money was put to good use," Mr Kingsley says. ``While we're both young and we have no other commitments wealth creation is a priority. We have a five-year plan and then we'll settle down and have a family."
Australians have grown rich on the value of their homes in the past 10 years. The average NSW household is estimated to be worth $339,000, more than half of which comes from the equity in homes.
And with the wealth comes enough financial savvy to know that equity can be saved. For the first time, the Reserve Bank tells us, Australians have been borrowing more against housing than they have been spending on housing assets.
Almost 15 per cent of housing loans now allow borrowers to withdraw some of the equity in the home without the need for paperwork or a second mortgage. The Reserve Bank says refinancing has been rising by around 30 per cent a year and some 20 per cent of borrowers who refinanced in the late 1990s used some of their home equity to pay for things like cars and holidays.
``Everyone still wants to buy a home," says Sally Manion, the head of financial planning at Ipac Securities . ``But [some people] are then asking how they can leverage off that. In the capital cities an enormous amount of money has been made, and people are willing to borrow against it."
Driving the trend is a mix of fear and opportunity. The fear is that if they don't make money for themselves, they could be left high and dry in an increasingly user-pays society.
But people such as Frank Ellul , an operations manager who lives on the Central Coast, have their eyes firmly fixed on the opportunities today's money creates.
Mr Ellul recently drew on the equity in his home to fund renovations and to look for an investment property in Sydney.
``I'm putting my house to work," he says. ``Your biggest asset is your home, but life's for living. It's no good if you've got a nice home but you're driving a bomb car and you can't afford to go to restaurants.
``This is a good way to get out of debt and invest for the future. I may even pay off all the loan and do it again."
Macquarie Bank's head of property research, Rod Cornish, says the cashbox mentality is now widespread as baby boomers start to think about retirement. ``Ten or 15 years ago, 45-55 year olds would have paid off their home and be looking forward to enjoying the good life," says Mr Cornish. ``But the baby boomers in that age group are now looking forward and realising they're not set up to do what they want."
The logical step for many is to borrow to buy an investment property, which has played a role in keeping this property boom going, and has probably also fuelled the huge boom in renovations.
``A lot of that spending is lifestyle related, but people are also thinking if they have a house worth X dollars when they're 60, they can downsize and have some money left over."
Sally Manion says there is definitely a group of Australians who view their home as a way of saving for retirement. They are thinking of trading down, subdividing, or moving out of Sydney.
The changing attitudes have also led to renewed demand for products that allow retirees to use home equity to fund their retirement.
St George Bank's head of home loans, Michael Leach, says the bank last year revived a reverse mortgage product to cater to demand from retirees who wanted to cash in on some of their home equity.
``People are living longer and many feel the pension isn't going as far as it used to, or their investments are not returning what they need to live on," he says.
The Reserve Bank governor, Ian Macfarlane , in a recent speech on borrowing levels, said competition and innovations in lending products had made it easier for home owners to top up their debt over their lifetime, rather than following the traditional path of paying it off.
Households remained in the ``risky" phase of home ownership for longer, he said.
Mr Macfarlane said that while rising household debt was not a significant danger, he was concerned by the high levels of borrowing for investment properties and that some households had not taken possible bad times into account when deciding how much they could afford to borrow.
TOMORROW
Children and moneyThe new gold rush.
THE PIGGY BANK OPTION Level of home ownership 71% Percentage with mortgages 32 Average mortgage size - NSW $216,100 Median house price - Sydney $460,000 Median house price - NSW $325,000 Proportion of household wealth in family home 55% Mortgages as a proportion of housing assets 20% Estimated borrowing level for those with mortgages 43% Proportion of loans with capacity to withdraw equity 14% SOURCE: ABS, REIA, RBA NATSEM
© 2003 Sydney Morning Herald
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