AHURI BRIEF

Mortgage stress, rental stress, housing affordability stress: what’s the difference?

Understanding different definitions of housing related financial stress

Last updated 27 Feb 2018

‘Mortgage stress’, ‘rental stress’ and ‘housing affordability stress’ are terms often used in the media to describe people experiencing financial strain in the housing system, but what do the terms really mean?

Mortgage stress

Mortgage stress has no one accepted definition but is often described as paying more than 30 per cent of household income in mortgage repayments and associated housing costs.

The ABS Survey of Income and Housing (SIH) limits housing costs to mortgage repayments (including both the interest component and the principal component), rent, property and water rates as well as body corporate fees. Mortgage/loan repayments include those that were ‘primarily to buy, build, add to, or alter the occupied dwelling’.  The SIH doesn’t include costs for repairs, maintenance and dwelling insurance, although these can be significant costs for a household.

Mortgage stress may be an overly simple definition for understanding whether households are having material problems with housing affordability. For example, a high income household may choose to spend significantly more than 30 per cent of household income to improve their housing aspirations but due to their high income they still have more than sufficient money after housing costs to pay for adequate food, health, education and recreation costs for the members of the household.

Mortgage stress may be an overly simple definition for understanding whether households are having material problems with housing affordability.

Mortgage stress may not necessarily be a good measure of housing related financial stress for lower income households either. By repaying their mortgages, households are both paying for housing and also actually saving their money in a tax-effective wealth asset that they may draw upon in the future. In addition, a lower income household may choose to pay more than 30 per cent of household income in order to speed up the full repayment of their mortgage debt, which can save the household significant amounts of money on interest repayments in the future, or to drawdown on their housing loan (and its cheaper interest rate than a personal loan) for non-housing purchases such as a new car or an expensive holiday.

These extra costs (such as drawdowns on housing loans or earlier loan repayments) to their required base mortgage payments may cause householders to pay more than 30 per cent of income in mortgage repayments, but it is not appropriate to describe the extra costs as housing costs that push householders into  financial stress.

For the reasons of being unable to determine what level of mortgage repayment is necessity and what is household saving or spending choice, AHURI research doesn’t readily employ mortgage stress as an accurate indicator of housing affordability. Nevertheless, mortgage stress may act as a broad indicator of housing affordability in a region or economic zone.

Rental stress

Rental stress also has no strict definition, but like mortgage stress, has best relevance for government policy makers when it is applied only to households in the bottom 40 per cent of Australia’s income distribution when housing costs exceed 30 per cent of household income. While lower income households may choose to pay more to rent a home in a location they deem more desirable, their rent payments are not a form of saving nor a tax-effective way to acquire wealth. Rather, any decision to pay more than 30 per cent in rent must be seen in context about how much rent lower income households can afford to pay to live in areas that are close (or close enough) to employment, health facilities, educational opportunities and other amenities.

Housing affordability stress

Unlike the previous two categories, housing affordability stress (HAS) does have a recognised definition: when households in the bottom 40 per cent of the income distribution pay more than 30 per cent of their gross income on mortgage or rent payments. HAS is used in academic research as a proxy measure for unaffordability, to indicate lower income households that are spending more on housing than they can afford and therefore don’t have enough to pay for food, heating, education, medical costs or be able to live close enough to amenities such as transport to work.

Although HAS applies to both lower income home buyer and renter households, in reality it has most relevance for policy makers when considering households who are renting. As is the case with rental stress, when these households pay more in rent it isn’t usually a choice but is because rents have risen in areas where the households have already been living or because they need to live in a specific higher-rent area to access work or to be close to essential services (e.g. schools, medical facilities).