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Job loss could pose problem on the home front -

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Job loss could pose problem on the home front: report

The World Today - Monday, 8 December , 2008 12:31:00

Reporter: Richard Lindell

ELEANOR HALL: There is more evidence today that mortgage stress is spreading from the outer suburbs
to the big end of town.

Interest rates may be on the way down but household debt levels remain at historical highs and an
increase in unemployment could trigger a sharp rise in loan defaults next year.

James Hickey is a banking partner at Deloitte and is the author of a report into the mortgage
industry.

He spoke to Richard Lindell.

JAMES HICKEY: What we did find this year is that older and/or higher income earners certainly
weren't as comfortable this year with their debt than they were last year. Which we believe
reflects the fact, this has been commented on over the last few months, that stress isn't just an
issue for the lower income earners, it is also now, becoming a notable issue for higher income
earners.

RICHARD LINDELL: What about defaults? Do you expect to see an increase in mortgage defaults next
year as the economy weakens further and presumably unemployment rises?

JAMES HICKEY: I think they are the two critical issues that will determine the level of, firstly,
arrears or loans falling into arrears and then subsequently loans potentially going into default,
will certainly be the level of unemployment. That is why you are seeing a lot of government action
at the moment trying to give stimulus to the economy, to try to mitigate the chance of unemployment
really rising.

Because if it does then that certainly places a lot more households under stress and that would
lead to an increase in arrears and ultimately default rates.

RICHARD LINDELL: Where do you see the housing market going in 2009? Will rising unemployment and a
weakening economy lead to falls in house prices? Some are predicting 30 per cent to 50 per cent
falls.

JAMES HICKEY: Look, we think there is going to some sort of resilient floor that will underpin the
Australian housing sector. That really comes from a few factors. One is the various government and
RBA actions to date, to support stimulus.

We also think if you look at the supply and demand, which has been published by Treasury and other
groups, it does go to show that Australia does have a shortage of available housing stock. And
particularly with the population growth which is forecast to continue around one-and-a-half per
cent per annum together with all the fiscal incentives being provided, then we think that does
provide some underpin to a flaw in the housing sector.

RICHARD LINDELL: The flaw in the housing sector that you talk about here, does that depend though
on unemployment not rising too much?

JAMES HICKEY: Obviously if unemployment rises, that does start to dampen the demand side of that
equation. Secondly, obviously if unemployment rises that feeds itself through to arrears and
default levels then may increase the rate at which certain properties may be repossessed.

But you know, you are still talking about arrears levels which are very small relative to other
global housing economies.

RICHARD LINDELL: If house prices are underpinned next year and remain flat or grow slightly, that
is obviously good news for home owners but it also suggests that affordability for first home
buyers is not going to improve in the near future.

JAMES HICKEY: I suppose a flaw and a underpin and we haven't put a what we believe the housing
market will actually move by, but certainly of falls of between 30 and 50 per cent we believe is
certainly not what we are saying, we believe the flaw will stop any such dramatic fall in housing
prices.

Certainly around first home buyer affordability, certainly there is a number of initiatives in
place to try to help first home buyers save for a deposit. Certainly with rates coming down, it can
make the entry level in terms of debt servicing more lighter for first home buyers than it would
otherwise been and there is certainly not the rampant demand growth that perhaps was seen around
the boom of the property market, driving a lot of prices up at a rapid rate.

RICHARD LINDELL: They are still facing house prices which I think in your report you found were
nine times income and when you think historically it was only two or three times wasn't it. So they
are still facing a huge issue in terms of affordability.

JAMES HICKEY: That is true. Obviously now with rates lower, that does help the debt servicing
requirement for a lot of those first home buyers. So with rates coming down it certainly does mean
that's a significant part of the equation, that first home buyers need to consider in terms of how
much debt as a proportion of their income they actually now are required to repay to the banks if
they were to enter into a mortgage.

ELEANOR HALL: That is Deloitte partner, James Hickey, speaking to Richard Lindell.