Mortgage stress keeps rising

Via Martin North:

Across Australia, more than 956,000 households are estimated to be now in mortgage stress (last month 924,500). This equates to 30.0% of households. In addition, more than 21,000 of these are in severe stress, no change from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA are higher at 4.9 basis points.  Flat wages growth, rising living costs and higher real mortgage rates are all adding to the burden.

Martin North, Principal of Digital Finance Analytics said “we continue to see the number of households rising, and the quantum is now economically significant. Things will get more severe, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at two to three times income. This is not sustainable and we are expecting lending growth to continue to moderate in the months ahead as underwriting standards are tightened and home prices fall further”. The latest household debt to income ratio is now at a record 188.6.

Overall, risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved. The recent Royal Commission laid bare some of the industry practices which help to explain why stress is so high. This is a significant sleeping problem and the risks in the system remain higher than many recognise.

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end March 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. They may or may not have access to other available assets, and some have paid ahead, but households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home.  Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

The forces which are lifting mortgage stress levels remain largely the same. In cash flow terms, we see households having to cope with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment remains high. Households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, and now prices are slipping. While mortgage interest rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises.  We expect some upward pressure on real mortgage rates in coming months as international funding pressures mount, a potential for local rate rises and margin pressure on the banks thanks to a higher Bank Bill Swap Rate (BBSW).

Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes.  Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households, contrary to the popular belief that affluent households are well protected.

Stress by The Numbers.

Regional analysis shows that NSW has 261,159 households in stress (260,830 last month), VIC 258,303 (249,192 last month), QLD 176,154 (165,344 last month) and WA has 126,606 (130,068 last month). The probability of default over the next 12 months rose, with around 10,474 in WA, around 10,299 in QLD, 13,827 in VIC and 14,807 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($960 million) from Owner Occupied Borrowers, which equates to 2.09 and 2.76 basis points respectively. Losses are likely to be highest in WA at 4.9 basis points, which equates to $726 million from Owner Occupied borrowers.


  1. “A negative wealth shock in midlife can lead to an early death. In adults over 50, the sudden loss of wealth is associated with an increased risk death over next two years….With limited years remaining to regain lost wealth, the health consequences of these negative wealth shocks may be long-lasting.” (AFR)
    You don’t say.
    And where is Australasia’s wealth tied up….?!

    • Ronin8317MEMBER

      Canada don’t have kangaroos or koalas, that’s why it can never happen here!!

      On a more serious note, condo prices in Toronto is still going UP, so the Chinese capital outflow is still ongoing.

    • This…

      “Rising rates and falling home values are starting to cause some problems for people.

      Many of the people who bought million dollar homes never were prepared to carry the mortgage on them when rates started to go north of 2% and sales started to fall.”

      Sounds familiar.

  2. reusachtigeMEMBER

    Best way to relieve stress is to get a Thai massage. Just hope though that the pretty and jovial Thai girls haven’t been replaced by somewhat less pretty and rough handed sour faced Chinamen ladies who’ve been brought in from the collectives.

    • If we assume only those who bought the bubble are in mortgage stress then there are slightly less than 1 million households in stress nationwide. If we assume an average household size of 3 then that would equate to about 13% of total population.

      Maybe we are not as stupid as feared if 87% stayed clear of the bubble.

      • Also those who “released equity” and who put up their homes as collateral for other people buying into the bubble. It’s a total house of cards about to topple.

  3. A lot of people are living off equity in their homes.
    Income doesn’t cover costs but home equity covers the gap.

    • I’ve had shysters explain this to me as a “business plan”. Every twelve months you just get your portfolio re-valued and increase your borrowings to the maximum. Couldn’t understand why I didn’t think they were geniuses.

      • My work mate was stoked when the bank revalued his house “for more than it was probably worth” so he could then unlock MOAR debt. He thought he was a genius. In truth he was probably technically in negative equity for a while.

    • I’ve heard people say “you only make a loss if you sell” but you can make a profit without selling in the form of “equity”. valuations lower aren’t real, but valuations higher are real