Mortgage stress to the moon

Via Martin North:

Digital Finance Analytics (DFA) has released the April 2018 mortgage stress and default analysis update.

Across Australia, more than 963,000 households are estimated to be now in mortgage stress (last month 956,000). This equates to 30.1% of owner occupied borrowing households. In addition, more than 21,600 of these are in severe stress, up 500 from last month. We estimate that more than 55,600 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though losses in WA are higher at 5 basis points.  We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.

Martin North, Principal of Digital Finance Analytics says “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”.

News On the Finance Sector Is Set to Get Worse.

Australia is horrified by what they are learning from the Royal Commission; yet this is only the beginning. News on the finance sector is set to get much worse.

Gill North, a Professor of law at Deakin University and Principal at DFA, suggests “the issues highlighted by the RC represent only the tip of the iceberg and Australia is in for a bumpy and uncomfortable ride”. The systemic risks across the financial sector and economy are now much higher than most participants realise, and these risks are exacerbated by the concentration of the finance sector and its many interconnections, the laxity of the lending standards over the last decade, the high levels of household debt (and the distribution of this debt), and the heavy reliance of the Australian economy on the health of the residential property market.

At some point down the road, the true resilience of the financial institutions, their consumers, and the broader economy will be tested and put under extreme pressure. And when this occurs, the high levels of household debt and financial stress, and the large disparities between the population segments that have considerable income, savings and wealth buffers, and those who have no such buffers, will become starker. “When the next housing or financial crisis hits (and the question is when and not if), the ensuing impact on the finance sector, many Australian households, and the broader economy will be severe. Yet most, if not all, of the financial institutions, the regulators, policy makers, and consumers still remain largely oblivious to what lies ahead.”

Martin North says: “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.

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 April 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 262,577 households in stress (261,159 last month), VIC 256,353 (258,303 last month), QLD 175,960 (176,154 last month) and WA has 128,600 (126,606 last month). The probability of default over the next 12 months rose, with around 10,513 in WA, around 10,316 in QLD, 13,830 in VIC and 14,798 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.4 billion) from Owner Occupied borrowers) and VIC ($936 million) from Owner Occupied Borrowers, which equates to 2.10 and 2.76 basis points respectively. Losses are likely to be highest in WA at 5 basis points, which equates to $696 million from Owner Occupied borrowers.  A fuller regional breakdown is set out below.

Here are the top post codes sorted by the highest number of households in mortgage stress.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


      • If you can’t make money selling garments that cost $2 to produce for $69…. only two conclusions:
        1. The rents are too damn high
        2. Wages are too damn high.

        The government is committed to “fixing” 2 and supporting 1.

        If you’re a wage earner – bad luck (& screw you!)

      • Bad news for Myer too, given 38 of the ‘stores’ are concessions within Myer stores…

      • NikolaMEMBER

        @ Peachy – I thought you are losing it when I read point 2 – that is until I read what the gov is working on.

      • Apparently 25% of all online garment sales in Oz now use AfterPay. Get it now, pay for it later.

        Fewer and fewer people have less and less money to spend…but a desire to spend more and more.

        Lots of empty shops and dinner tables coming to streets near you

      • PeachyMEMBER

        Really? 25% of people can’t afford to buy clothes (I’m assuming that’s what afterpay is)?

      • Jumping jack flash

        Both 2 and 1 are built on a massive debt bubble that made everyone feel rich, even though they were poorer than ever, because the banks told everyone that debt money was the same as, or better than, actual money.
        I mean, you can use both of them to buy stuff, so what’s the difference, right?

        Both 2 and 1 will need to shrink when the bubble shrinks.

    • Everybody sees how dual income middle class familiies you would think would well off –
      try to live below the poverty line on their disposable income –
      after being sucked into overpaying at auction with an “mortgage stress” level – commonly pay 50% of income to mortgage.
      Morthgatge stress in suburbia is really considered over 70% of your income into the mortgage,.
      LOL this is by design – the banks use the Henderson poverty estimates for what should be left after you get a mortgage.
      (And you have to get this mortgage amount, as house Prices to compete to keep up with foreign cash buyers, the marginal price with laundered cash).

    • The ultra high cost of prospectively buying a home for my family means I cannot spend any money in retail stores. High house prices cause an anti-wealth effect.

      • bolstroodMEMBER

        The $Aussie falls ,adding in a 10cent a litre petrol hike, imported goods get dearer, and people tip over the edge.
        Our “Wealth” is a chimera.
        Debt bondage is a disaster now as it was in the 1930’s
        Lest We Forget.

  1. michael francis

    For every full time job that pays $100k is lost, but is replaced by 2 part time jobs that pay $15k, that defines stress. However if you are an economist, that defines growth because there are more jobs.

    • GDP per capita is way too complicated for the politicians to use. They have to do a difficult calculation to divide the GDP by the increased no of people.
      They can easlity calculate the capital gains on their multiple negative geared property portfolio though.

  2. wasabinatorMEMBER

    No idea why they would feel stressed. The most indebted will be the most likely to be recipients of rescue programmes. It’s the ones who borrowed prudently, or worse didn’t borrow at all like me (bail in fodder) who should feel stressed.

    • Yes the stress of the opportunity cost of not buying in a bubble. You can still share in the bailout costs though in future.

    • One can only hope that the prudent will not be given the corn cobb. However, there is a fair chance they will be given the nature of the financial world. They do like their debt slaves …

    • That depends on whether you are saving to buy a house. As a percentage, the amount you lose on a bail-in will be less than house prices falls. You will relatively still be much better off.

      I am more concerned about NIRP, QE, massive FHOG, or some other idiotic inflationary stimulus.

    • Super Phoenix

      Because they haven’t borrowed enough. I bet they are on average a few trillions short.

    • Toowoomba prices have boomed I heard when i visited there last year.
      Its a metropolis of 2 million people now.

    • Hill Billy 55MEMBER

      From what I understand it has the lowest unemployment in QLD. So has drawn in quite a crowd. Will get ugly when the jobs vanish. I’ve been keeping an eye on things. Visited a home open last spring listed at “above $650K” which was sold in January for $662,500. Previous purchase was $750K in 2015. We have seen quite a few houses purchased in 2014, 2015 again listed on the market.

      The weather has been very poor up that way, not drought, but below average rainfall for quite a while. Actually going up this weekend, shall report any excitement.

  3. Cant they just get the money from deceased people. Isnt that what the banks do ?

  4. Peter Sutherland

    Time between unable to pay, foreclosure and forced sale ? 6 Months ? A year ?

    Credit cards, sell the cars, cut back on everything etc – then banks offer leniency, then courts, then on the market.

    People I know in very well heeled inner Melbourne are losing jobs left right and center – construction, admin, infrastructure admin etc.

    All of them just cut back – look stressed. Real stressed.

    • At least a year, I would say.

      If it gets going properly, it will take even longer as the banks will string it out. Extend and pretend.

  5. surflessMEMBER

    How are enrolments for private schools going? To me that is the real barometer to how the economy is fairing.

    • Enrollments are going down for most private schools in the east of Melbourne. Only highly ‘academic’ schools are seeing increases. It looks like many parents who otherwise would prefer private education for their kids simply cannot afford tuition any more. No real surprise, given the increasing cost of living…but wait a minute, inflation is not really up, is it?

      • PantoneMEMBER

        “core inflation’ isn’t up, but you don’t really need to eat or use petrol, now do you?

  6. Those with mortgage stress are like those with a large waist line.

    They have been lied to by big business and politicians, thinking they were getting a good deal when in fact they were being screwed. Led by a combination of gluttony, greed, and envy with a possible mix of sloth and pride. I feel no schadenfreude for their plight but they did it to themselves, much like the obese in society having diabetes, heart disease, etc.

    Seems like it is better to live a contrarian lifestyle and almost do the complete opposite of what everyone else is doing. You’re more likely to be healthy, happy and live a vibrant life.

    • Super Phoenix

      “Seems like it is better to live a contrarian lifestyle and almost do the complete opposite of what everyone else is doing.”

      There is a reason why contrarian investment strategies work.

      • Which explains why Reusa is so successful! He’s such a contrarian here… he’s beyond successful! 🤯

    • PeachyMEMBER

      Unlike you, mr 🐻, I am really hanging out for a bunch of schadenfreude!

      That’s what I’m in it for!

  7. if you’re more stressed in post code 2170 about your mortgage then you are about ice addicts and middle eastern crime gangs then …. you got no hope… RUN

  8. Jumping jack flash

    Only trickle-down can save us now!

    oh… wait…
    Everyone has too much debt for that to work.

    Hmm… Lower teh rates?
    Yes! That’ll fix thing!

    • Yeah, Swizzy, there are reportedly no less than 18 million empty houses in the U.S.of A. or six each for every homeless American citizen, yet every realtor will still try to tell you there is nothing to buy due to very low “Inventory” – they must presume 99% of people cannot use Google search function on their cell phone – friggin’ morons!

  9. You’ve really got to feel for the people. They’re just suckers who got pulled into some church that ripped them off, and will keep ripping them off as long as they attend the services in the hope that the afterlife will be better.

    To all those who were told that drawing equity out to chuck back into the debt monster, well there’s no cure for stupid, but you have to have some sympathy for them.