How To Avoid Affluent Stress

We all know the eastern suburbs is a fabulous place to live.

From the beaches to the harbour, inner-city and parks, there’s a lifestyle to suit all buyers.

But that means the property doesn’t come cheap – in fact, it’s one of the most expensive places to live in the whole country. Because of this, data now shows an increasing number of households in Sydney’s East are suffering what’s known as affluent stress.

What is affluent stress?

Affluent stress is a term coined to describe financial stress – particularly mortgage stress – in high-income areas: places like Sydney’s eastern suburbs.

Exact definitions of mortgage stress vary but, as a guide, it’s when your mortgage repayments are greater than 30% of your pre-tax household income.

While mortgage stress can happen to buyers at any price point, the more you borrow the more likely it is to happen. So it should come as no surprise that reports show it’s actually likely to affect those in wealthier areas.

How common is mortgage stress?

The June 2019 data from Digital Finance Analytics (DFA) revealed 32% of Australian households suffer from mortgage stress. This means as many as 1,063,000 households are potentially having trouble paying the mortgage.

Comparing this to the data from two years ago shows mortgage stress is on the rise despite interest rate cuts. In August 2017, 860,000 or 26.4% of Australian households were experiencing mortgage stress.

According to the RBA, household debt-to-income levels are also at record highs.

Commentators put the increase in mortgage stress rates down to a number of factors: property values and rents have been dropping, living costs have risen, wages have stagnated and some households have overcommitted with larger multiple mortgages, as well as other debts and lifestyle costs to pay off.

Who is suffering affluent stress?

The report from DFA showed that while the top postcodes suffering mortgage stress are those in the outer suburban fringe areas, there are several blue-chip areas well-represented on the list. So the number of households suffering affluent stress has definitely risen.

According to the Australian Financial Review, Bondi tops the list of suburbs for the most borrowers in what is classified as “severe” stress (at risk of defaulting) with 1,078 households affected. This is followed by 876 in Clovelly and Randwick. Dover Heights also makes an appearance, and Paddington came in at number 13.

Households suffering severe mortgage stress may be unable to make their home loan repayments from their existing income, but selling can be a last resort. They continue to try and maintain their lifestyle by making cutbacks in other areas, using credit cards or refinancing. It’s a precarious situation that can quickly spiral out of control.

Will mortgage stress start declining?

In the wake of the Banking Royal Commission, lenders have become slightly more cautious, applying a more rigorous eye to income and expenditure. This means you may have to jump through a few more hoops and allow a little longer to go through your home loan application.

This has also had flow-on effects on the property market and has been one of the contributing factors in keeping prices flatter over the past few years. But with the recent consecutive rate cuts the confidence is beginning to return so we will all need to be wary.

How to avoid mortgage stress

All property is expensive, but the best way to avoid mortgage stress is to buy a home that doesn’t push you to your financial limits. Before you buy, set up a realistic budget that takes into account a buffer for unforeseen circumstances, and be realistic about your day-to-day expenses. It can help to see a financial advisor to establish some financial goals.

And, if you own a home and you find yourself under financial strain, it’s best to act early and nip the problem in the bud. There are some excellent resources at moneysmart.gov.au or you can contact the free National Debt Helpline on 1800 007 007.