Digital Finance Analytics’ (DFA) Martin North appeared on ABC News 24 yesterday presenting new DFA research, based on a survey of 26,000 households, assessing the sensitivity of Australian mortgage holders to rising interest rates:
According to DFA, one-in-five home owners would find themselves in mortgage difficulty if mortgage rates rose by as little as 0.5%, whereas a further 4% would be troubled by a rise of between 0.5% and 1%. Meanwhile, 42% of homeowners would be under financial pressure if mortgage rates rose from their average of 4.5% currently to the long-run average of 7%.
As well as, the interview with ABC News above, Martin North was quoted in News.com.au yesterday, where he noted:
“[These results are] important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards”…
“If you look at what people have been doing, people have been buying into property because they really believe that it is the best investment. Property prices are rising and interest rates are very low, which means they are prepared to stretch as far as they can to get into the market”…
“If you go back to 2005, before the GFC, people got out of jail because their incomes grew a lot faster than house prices, and therefore mortgage costs. But the trouble is that this time around we are not seeing any evidence of real momentum in income growth”…
“My concern is a lot of households are quite close to the edge now — they are not going to get out of jail because their incomes are going to rise. We are in a situation where interest rates are likely to rise irrespective of what the RBA does … There has already been movement up”…
“The ratio of debt to income is as high as it’s ever been in Australia and there are some households that are very, very exposed”…
Martin North also believes that young affluent households are most exposed to rising mortgage rates:
“It is not necessarily the ones you think would be caught. And that’s because they are actually more able to get the bigger mortgage because they’ve got the bigger income to support it”.
“They have actually extended themselves very significantly to get that mortgage — they have bought in an area where the property prices are high, they have got a bigger mortgage, they have got a higher LVR [loan-to-valuation ratio] mortgage and they have also got lot of other commitments. They are usually the ones with high credit card debts and a lifestyle that is relatively affluent. They are not used to handling tight budgets and watching every dollar”…
“The banks tend to focus in on what they feel are the lower risk segments and the young affluent sector has actually been quite a target for the lending community in the last 18 months. Be that investment properties or first time owner-occupied properties, my point is there is more risk in that particular sector than perhaps the industry recognises.”
Finally, Martin North does not believe that the banks’ lending standards are sufficiently robust:
“I think we have got a situation where the information that is being captured by the lenders is still not robust enough. I am seeing quite often lenders willing to lend what I would regard as relatively sporty bets … I’m questioning whether the underwriting standards are tight enough”…
“The other thing that I have discovered in my default analysis is that those who have got help from the ‘Bank of Mum and Dad’ to buy their first property are nearly twice as likely to end up in difficulty … It potentially opens them to more risk later because they haven’t had the discipline of saving”…
“If you have got a lot of people in the one area struggling with the same situation, you might see property prices begin to slip. If we get the property price slip, and we get unemployment rising and interest rates rising at the same time, we have that perfect storm which would create quite a significant wave of difficulty”.
“We need to be thinking now about how to deal with higher interest rates down the track. We can’t just say it will be fine because it won’t be,”
Sage advice.
