The age-old adage that distinguishes between ‘good’ and ‘bad’ debt might need revisiting. Traditionally, debts incurred for asset accumulation, like mortgages and student loans, have been labelled ‘good’ due to their potential to increase in value or yield higher future earnings. Conversely, ‘bad’ debt is often linked to consumptive spending, like credit card shopping. However, the distinction is not as clear-cut as it seems.
Debt, fundamentally, deducts from your future financial flexibility. For instance, purchasing a $500 plane ticket on credit at a 20% annual interest rate trades immediate gratification for a future financial obligation, ultimately costing more and reducing disposable income.
Shifting focus to the housing market, let’s examine the shifts over the decades. In 1970, the average Melbourne home was priced at 4.5 times the average annual salary, with banks offering mortgages up to 2.5 times a person’s salary. This ensured manageable repayments. Today, the landscape has dramatically shifted. The average price of a unit in Melbourne now demands nearly 9 times the average salary, with much stricter borrowing caps, making home ownership a hefty financial burden.
This significant increase in the cost-to-income ratio for housing reveals that larger, potentially unsustainable debts are being shouldered by homeowners. The shift in lending practices that now allow for greater borrowing amounts illustrates a broadening financial risk, binding significant portions of homeowners’ income to debt repayments, along with taxes and other living expenses.
Historically, property ownership was seen as a surefire path to wealth accumulation, but this narrative is supported by rising levels of debt which inflate property values artificially. This approach risks precipitating a crisis when debts become unmanageable, forcing homeowners to sell at a loss.
Moreover, the ideal of homeownership as a societal boon is increasingly contested by global examples of countries with robust rental markets and lower homeownership rates. These cases suggest that high homeownership is not necessary for societal stability and may actually exacerbate inequality, particularly affecting young Australians without familial financial aid.
The evolving market conditions and lending practices have transformed the financial landscape, making the traditional categorisation of mortgage debt as ‘good’ increasingly problematic. The growth in housing costs relative to income and the surge in associated debt levels call for a re-evaluation of what constitutes sensible borrowing.
Looking ahead, potential homeowners should critically evaluate their financial situations and consider alternatives to heavily indebted purchases. Recognising that the financial choices made today will have long-term effects is crucial. Those considering entering the property market or managing existing mortgages should seek tailored advice to navigate these complex decisions.
As financial landscapes evolve, rethinking debt and its implications on personal and economic stability is not just prudent—it’s necessary. For those pondering property investments or struggling with mortgage decisions, as always please feel free to reach out.
