The bottom 20% of households has recorded the highest rate of growth in investment income at 8.2% per year, according to the latest analysis from audit, tax and advisory firm KPMG.
In comparison, the yearly rate for households outside this bottom 20% bracket was only 2.2%, the report entitled Financial Stress in Australian Households: the haves, the have-nots, the taxed-nots and the have-nothings said.
“This increase reflects a greater exposure to investment activities over the past decade, such as negatively geared property investment, which is confirmed by the substantial increase in value of second mortgage payments being undertaken within this quintile.”
While analysts said it was “understandable” that the poorest in Australian society would wish to diversify and increase their incomes, they admitted that this group is least able to take on financial risk associated with any kind of geared investment activity.
“The top 20% of households is the only cohort to have a greater relative exposure to investment income than the bottom 20%, but it has the highest levels of salaries and wages from which to buffer any downturn in investment returns if that were to occur.”
As interest rates start to climb out of the current low rate environment, KPMG analysts predict that higher mortgage repayments will take up a higher proportion of non-discretionary household costs in the future.
“While financial stress appears relatively stable now, in the event interest rates increase – either due to rises in wholesale funding costs, a tightening in official cash rates, or both -it is likely that household financial stress will increase.”
“It is important to note that the number of very low income households with second mortgages is still low – but has grown by about 20,000 over the past ten years,” Brendan Rynne, chief economist at KPMG told Australian Broker.
“In 2006, only 1% of respondents in the lowest quintile had second mortgage payments – by 2015, it was 2%.”
This was very likely linked to negatively geared property investment which is why this bottom quintile was receiving more investment income, he said.
As for how these low income earners were able to take out loans despite stricter serviceability criteria, incidences of over lax lending during the past ten years were possible, Rynee added.
“It depends on when the loans were taken out. The APRA requirements for interest rate buffers are relatively new (post-2014), so it could be that some lending was done prior to this that might have different prudential management overlays.”
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