Will people walk away from their mortgages? Not in Australia

Probably worth walking away from this mortgage

The SMH had a scare article in the main section of the paper today, arguing that Australian house prices were about to drop, following the US.

The rise in the number of Australian households who are in so much difficulty with their mortgage repayments that they are facing selling up – or being sold up – is continuing its ascent beyond the 200,000 mark reached in November. By this year’s end, some 270,000 Australian households will be in severe mortgage stress.

No one knows how Australia’s housing asset bubble will end. But new American research points to an unexpected and unnerving phenomenon for banks caused by a wave of more belligerent borrowers caught in a property bubble burst.

 

Many are now more likely to lose their emotional attachment to their homes and walk away, tossing the keys to the bank, even if they have the capacity to keep making mortgage repayments. One published estimate found that 17 per cent of all Americans who default on their mortgage repayments no longer choose to try and tough it out – they walk off.

The problem with this argument is that the rules are different. In many US states, if you choose to walk away from your house and mortgage, the bank is only entitled to whatever it gets from selling the house. It is called a non-recourse mortgage, and has been the subject of fierce debate as to whether those rules should be changed. There are consequences for your credit rating, but you don’t have further liability. But here in Australia, if you walk away, you still owe the money to the bank. Unless you declare yourself bankrupt (which itself has worse consequences here in Australia than in the US, where the stigma is not as great), the bank can still pursue you for the money even if you aren’t living in the house.

I’m one of those who believes, with The Economist, that Australia house prices are still over valued. The ratio of prices to rent in most parts of Sydney make it uneconomic to buy rather than rent, unless you are betting on big house price rises in future (which is always dangerous). And the rental market hasn’t got close to overheating in the way that usually presages massive house price rises.

But it’s pretty silly to draw analogies from mortgage defaults in a market where the rules are completely different as to when and how our bubble will burst.

  3 comments for “Will people walk away from their mortgages? Not in Australia

  1. February 15, 2010 at 8:25 am

    I wasn’t aware of that US rule – that explains a lot about how the sub-prime thing could keep inflating and inflating – the level risk was comparatively minimal. I wonder if that law stood in the states carrying the worst toxic mortgages?

  2. Jennifer
    February 16, 2010 at 6:23 pm

    You can walk away from your house without having to pay the bank the remainder of what you owe them, but there are still two really big consequences: your credit rating is shot for 7 years, and you lose whatever equity you had in the house. Also if you like your house, if you raised your kids in it, there’s that.

    That said: I assume you listened to NPR’s Planet Money podcast on this? It makes me feel like an idiot for actually paying my mortgage every month.

  3. Brian
    February 16, 2010 at 9:28 pm

    And hasn’t the quality of the Sydney Morning Herald fallen away in the last year or two. Their transport rantings are straight from middle management in Railcorp and their understanding of almost anything else is doubtful.

    I think it is time to find another newspaper.

    Brian

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