Ms. Plakolm and the debt trap

The Secretary of State for Youth warns young people against excessively loose indebtedness. In July, she publicly denounced the financial market regulator’s overly strict lending standards.

Praise where praise is due: Finance Minister Magnus Brunner and Youth State Secretary Claudia Plakolm addressed an important problem on Tuesday, namely the over-indebtedness of young people. On so-called social media, under the motto “What does the account say?”, they want to raise awareness among 14- to 20-year-olds about how devastating it is to get away from crazy trends like #Klarna Debts (you brag about the debts you have from the Swedish payment service provider thanks to its “buy now, pay later” function at the touch of a finger) to be played into insolvency.

But why did the same State Secretary Plakolm, who today warns about the debt trap, publicly agitate for the relaxation of criteria for granting loans less than six months ago? On July 1, Plakolm and Lower Austria’s governor, Johanna Mikl-Leitner, attacked the financial market regulator amazingly sharp at. “The authority, which is independent of instructions, is responsible for the disproportionately high hurdles that borrowers in Austria have to shoulder,” reads its press release. As a reminder: the FMA regulation for sustainable procurement standards when financing residential real estate requires that you may spend a maximum of 40 percent of your household income on repaying a housing loan and that you must finance a fifth of the total costs of purchasing the property yourself.

The housing loan thing

Isn’t it contradictory to first demand simpler debt and then warn against too simple debt? When asked by the “Presse”, Plakolm’s cabinet replied: “Our concern is, for example, to question in-app purchases or the 43rd (figuratively speaking) installment payment at Klarna, because in total this drives young people into unmanageable mountains of debt, encouraged by this Trends like #klarnakrediten or “Buy now, pay later”. A good point. It’s not just young people who lose control of what they do when using cell phone apps all too quickly.

But then comes the follow-up from the State Secretary’s cabinet: “Investing in a property and thus in the future is on a completely different piece of paper. Here the loan represents a real equivalent or an investment, not just the quick satisfaction of needs. The mix of high equity and debt service ratios and the ECB’s increased key interest rate are making it increasingly difficult for young couples and families to obtain a loan to create living space.” Postscript: “The default rate for loans for single-family homes or living space is also loud Information from the banking sector is very low, which is why easing is being called for here too.”

Mortgage protects creditors, not debtors

Wait a minute: if you can no longer pay your mortgage, the bank will seize your home away from home. Securing a claim serves the creditor, not the debtor. The bottom line is that an insolvent young home buyer faces the same sobering record of failure as a peer who has discharged his consumer loan debts after debt settlement proceedings (commonly known as personal bankruptcy). The low default rate for mortgage loans does not serve as an argument for relaxing the FMA’s lending criteria. This is precisely why these borrowers so rarely default (a full 2.5 percent in the last quarter of the previous year, surveyed by Statistics Austria), because the rules are so strict. One would not argue for its abolition by pointing to the impressive decline in the number of road deaths since the introduction of the seatbelt requirement.

Of course, it is too difficult to buy a house or apartment these days in Austria, one of the richest countries in the world. But there are good reasons not to try to combat this through riskier lending. What happens when banks don’t look closely enough at their debtors’ solvency can now be seen in real time using the example of the Signa affair.