Aussie mortgage stress climbs to 20 year high

Via Martin North today:

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

The latest RBA data on household debt to income to March reached a new high of 190.1 [1] …

… so no surprise to see mortgage stress continuing to rise. Across Australia, more than 970,000 households are estimated to be now in mortgage stress (last month 966,000). This equates to 30.3% of owner occupied borrowing households. In addition, more than 22,000 of these are in severe stress. We estimate that more than 57,100 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 5.2 basis points.  We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.

The latest S&P Ratings data shows a rise in 90 day plus delinquencies in the SPIN series for April, from the major banks. So despite the fact it only covers MBS mortgages the trend is consistent with our stress analysis!

The inevitable result of too lose lending standards and easy loans is creating an intractable problem for many households given the continued low income growth, high cost environment. This also means risks to lenders continue to rise.

Our surveys show that more households are keeping their wallets firmly in their pockets as they try to manage ever tighter cash flows. This is an economically significant issue and will be a drag anchor on future growth. The RBA’s bet on sustained household consumption looks pretty crook. Even now, household debt continues to climb to new record levels, mortgage lending is still growing at an unsustainable two to three times income. Falling home prices just adds extra picante to the problem.

We continue to 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.  Rate pressure will only increase as higher Bank Bill Swap Rates (BBSW) will force more lenders to lift their mortgage rates, as a number of smaller players already have done.

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 June 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.

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 264,737 households in stress (264,344 last month), VIC 266,958 (271,744 last month), QLD 172,088 (164,795 last month) and WA has 129,741. The probability of default over the next 12 months rose, with around 10,953 in WA, around 10,526 in QLD, 14,207 in VIC and 15,200 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($927 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 5.2 basis points, which equates to $761 million from Owner Occupied borrowers.

A fuller regional breakdown is set out below.

Here are the top 20 postcodes sorted by number of households in mortgage stress.

That recent spike in 90 day arrears at the major banks looks like refi failure as interest-only resets.

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


    • He seems to not give a fark about any of the questions. Laughing and joking. And she could have asked Baird did he become a banking lapdog for the money. That would have been a great question.

      • BrentonMEMBER

        Not my interpretation, especially in regard to Baird taking his job. Seemed like a man putting on a face in front of a room full of his colleagues.

        That’s an obvious note, much covered when Baird first retired from being a top government representative and miraculously took on a million dollar bank job a day later.

      • proofreadersMEMBER

        Brenton – think that Mike may be clocking at closer to $2+ million on an annualised basis?

      • BrentonMEMBER

        Might be mate, I think it was only around a mil when he first jumped ship though.

      • boomengineeringMEMBER

        I wonder why he had a worried look on his face while taking with him at the dog park at that time

  1. Torchwood1979

    And 20 years ago was just before the big boom started. Therefore it must be a great time to pile in, load up on debt and watch your portfolio of negatively geared investment properties shoot for the stars!!!!!!!!!!!!!

  2. the interesting thing is, this is stress, what the hell is stress
    how about 1 in 6 cant repay their credit card debt and i recon 3 in 6 surfers cant repay their cc debt
    when do we arrive at the stage when stress becomes default.

    Going by the definitions, households “stressed” are in commercial lingo trading whilst insolvent.
    Time we called spades, shovels

    • darklydrawlMEMBER

      The issue for the banks is a ‘stressed’ customer is endlessly profitable, where a default / bankrupt customer is not. It is also bad PR for them to force folks into default, although realistically that is where many of them are going to end up.

      Guess this is what you get when an entire generation or two of working folks that haven’t experience a recession. They have no idea how ugly it can get….

      • More to the point “stressed” means they are paying every spare cent they have to the lender. Perfection, from the lender’s viewpoint.

    • Now we can see what is going on?

      Group Likely to fail %
      Battling urban 2.5
      Disadgantaged fringe 3.2
      Exclusinve professional 11.9
      Mature stabe families 6.9
      Multicultural establishment 6.5
      Rural family 6.6
      Stressed seniors 13.0
      Surburban mainstram 7.6
      Wealthy seniors 16.7
      Young effluent 18.0
      Yung growing families 3.2

      • Young effluent? That’s unbecoming of you to be so politically correct. Shirley you mean “Young sh*ts”, n’est ce pas? ?

      • BubbleyMEMBER

        My favorite was 6.9% of stabe families.

        Sounds like Christmas at the Bubbley family dinner.

    • WW – if this data is correct, I think things will start to fall apart inside 12 months. This Christmas will be as bad (in RE terms) as last one with no spike in Q1 as it happened this year. That will push lot of people over the edge. Plus the last spending binge people will have during this Christmas will force them to max their CCs to the top but no re-finance option to save them.

      I think lot of them are holding and hoping RE prices will start to raise so they can sell and pay off their debts. If prices continue to go down (at around 0.2% weekly falls) game will be over inside 12 months from now.

      • Well we dont know how the data was obtained, and the method of its presentation
        but, 6 weeks ago it took ne 40 minutes to drive from coolangatta to surfers
        now wiht so few cars on the road i can do it in 25.
        your secondary reports of punters shopping supports the concept the punters are tapped out
        but the debt is very much alive.
        Wang falling off the edge is a sure sign

      • HadronCollisionMEMBER

        Should make my purchase of my 40th present watch a fun experience – hmm, $X you say? Today I would like to pay $X-20% as I note your online competitor sells for $X-30%.

        I may be betraying my ignorance or conservatism here, but what is with maxing out ccards for Xmas. Do people not save some cash for Xmas?

    • haroldusMEMBER

      3 in 6 surfers cant repay their cc debt

      Gnarly dude. That’s really harshing the mellow.

      • The govt treasurer up here is branded “Jaqui OWE”
        But from ASIC :Australians owe
        A total of $45 billion in credit card debt,
        And about half of us make repeated low repayments and remain continually in debt.
        The interest on the debt is charged at 17%

        Up early the other morning, before dawn, when a fisherman was just getting his gear out of his ute, but already 20 or so surfers were out at duranbah
        he recons most are so addicted to the vibe they are more fanatical lunatics than fisherman. everything comes after, makes way for, time in the water!.
        I agree,

      • I’m one of the long haired layabouts you speak of. Not an easy addiction to give up.

    • Wino Shinyface

      and those are the type of properties backing most foreign RE investments made here

  3. reusachtigeMEMBER

    Thankfully Thai massage shops have also increased at the same rate so there is plenty of stress relief available out there.

    • and chinee, last time i was in the mall at surfers, there were boarded up shops wall to wall, people pising in shop windows, but plenty of chinee massage joints.
      I asked a couple of locals what is going to happen with the mall, they told me it should be pulled down.
      hows that for town planning.? the tradition of surfers now in the dumps soon to be demolished

      • reusachtigeMEMBER

        The rapid growth of Chinamen lady staffed shops saddens me especially if they were once Thai girls. The Chinamen ladies all have that rough commie worker woman edge to them where as the Thai girls are sweet and pretty and love administering pleasure with a beautiful smile.

      • Wino Shinyface

        here’s one for ya wiley, theyre all covert CCP military cells, which explains the ruff hands reusa has a problem with

    • darklydrawlMEMBER

      Yeah, I have noticed this. On our very run down local shopping strip there are three massage places now. Guess that is what mortgage stress can do for a neighbourhood! Maybe some people will get a happy ending in this mess after all (?) 😉

      • reusachtigeMEMBER

        The best ones around the Sydney CBD actually close at about 8pm! They are daytime outfits for relaxing office workers during their breaks. Really.

    • gballardMEMBER

      Why the need for stress relief Reusa ? According to the BS that you peddle, and appear to believe in, property never goes down and therefore everybody on the property ladder is rich and happy.

  4. Jumping jack flash

    And only another 30 years of no wage growth (for you) all the while gouging the prices of living essentials to line the pockets of the executives so they can get out of their own debt.

    Executives are people too, and people have debt. Mountains of it.

    Stepping on the heads of the workers to climb their way out of the debt trap, set by the bankers?
    Hm. Sounds suspiciously like capitalism.

    Please be careful and watch your step, there are wolves everywhere.
    If it looks easy, in the words of the good general, “its a trap!”.

    • Surely, the Debt Pile has reached the critical angle of repose by now? That stage where no matter how much more debt is piled on top of the asset prices heap, prices don’t get any higher, but the debt just spreads out around the bottom of the heap – until the pile eventually collapses. All it will take is one more dollar of debt, on some arbitrary day, and the debt side will be on!

    • Check the table above, the young effluent have an 18% risk of failure.
      my call is that is 2x too low as steady state economic conditions will not prevail as you note

    • Jumping jack flash

      I don’t think a total collapse is that close yet. They still have a bit of time to implement the US’ prime directive of pretending everything is ok while they freeze new debt which (hopefully) dries up sales so revaluations don’t occur, and then wait. And wait. Aaaand wait for the existing debt to be repaid until the time they can raise interest rates safely.

      At least it makes sense to me for them to try the lost decade (or 3) approach as this would probably equate to a “soft landing”.

      • wow. what kind of magic is that. Where you freeze new debt and nobody .. absolutely nobody in the entire suburb is in a divorce or illness or have to move and is forced to sell, effectively forcing a revaluation of ALL houses in the suburb??

    • JJF those most at risk will have supped at the oasis of mum and dad, they will also need 2 incomes to maintain their upkeep.
      a very precarious position for all, of them.

  5. Willy wonkaMEMBER

    Was there a change from the first of July this year that the duration of the bankruptcy term is now reduced to 12 months ,and that the first 50k in wages cannot be garnished ?

    • HadronCollisionMEMBER

      can anyone confirm this?
      Essentially a debt jubilee, if you think about it (if your assets are in neg equity) – or am I look at it incorrectly.

  6. Interest only loans are equivalent to renting from the bank, hoping for capital appreciation. The interest on an interest only loan is already higher than what renting would cost, especially when you consider stamp duty and unearned interest on any deposit. When the hope of capital appreciation turns to fear of capital loss it will be a rush for the exits. Options trading is dangerous, especially when applied to million dollar homes!

    • >Options trading is dangerous, especially when applied to million dollar homes!

      Like playing hot-potato with a sea-mine… We ditched the grenade hot-potato, as that was too easy.

    • Jumping jack flash

      very true, but like the US discovered (the ones who wrote the rule book) loss only occurs after a revaluation.

      The trick is to never revalue so the value remains at whatever it was when the last mountain of debt was attached.
      No revaluation
      No loss
      No rush to exits.
      No risk increase
      No interest rate increase

      No interest rate increase means everyone can continue paying down debt rather than defaulting.
      Mortgage stress is (somewhat) contained – relative to costs of living, which might be regulated somehow, I don’t know how or if that’s even possible to do since private companies control almost all of them. Maybe subsidise the living cr*p out of living costs? They hinted at this with electricity. Or perhaps a universal basic income to partially offset living expenses?
      They’re not impossible options and they would work for a while.

      Most importantly, everyone’s happy. Well, the banks are happy, and that’s all who matter.

      • >… No interest rate increase

        Say, how’s that working out for them, right about now…

      • HadronCollisionMEMBER

        What triggers a reval

        Refi to another bank
        Ending of IO loan convert to PI and “I’d like a lower rate please on X Y Z offer” which may result in “option a) you take PI at IO+200bps and pay it off or else b) we reval and you may find you’re in negative equity – you choose”

        Or can they do the above without vals. Probably not in Opt A

      • Your observation on what rules are adopted when seems to be the nub of it. The interested spectators can think they see the future, but the big players have the ability to either apply the rules at their whim, or have them changed for their advantage.

      • Dave666MEMBER

        Err…I think you will find that it was the “bad debt of the banks” that were not revalued and had very generous accounting methods used for the purpose of maintaining a solvent balance sheet. Basically banks were allowed to hold these bad loans on their bookes at the original value, rather than writing them down with losses. Mortgage holders did not get any of these benefits. Which is why there was;
        Revaluation – down!
        Loss of equity/capital for mortgage holders
        A stampede towards the exit (very few got out – door closed)
        Massive increase in risk
        Big increase in interest rates (bigger than the reset interest rate) until the FED but the fire out with QE & buying assets to drive down interest rates.

        The banks may get saved – not mortgage holders or anyone relying on high house values.

  7. Jumping jack flash is right there’s a lots of wolves licking their lips right .cashed out last year .The sent of blood in the air has them giddy in anticipation bring on the sheep’s

    • The money to be made in the wreckage of a crisis is often more than you would possibly imagine.
      One of the abiding lessons of the past few decades of booms and busts is that the sell down following the bust does not discriminate between good and bad companies.
      Why the propensity for Australians to get caught up in booms and busts.
      We are too lazy to do our own homework on over-the-top ASX statements, dodgy accounts hiding off-balance sheet activities and profit and loss statements pumped up with one-offs and questionable revenue recognition practices
      We are suckers for financial products offering returns that are too good to be true.
      We are, more often than not, too scared to ask questions about financial promises that don’t make sense.We too often do not check what is really being sold.
      ASIC released a study showing that client losses in retail over the counter derivatives were extraordinarily high. The 450,000 punters involved in this high risk game have had unprofitable trades 80% of the time in binary options, 72% of the time in contracts for difference (CFDs) and 63 % of the time in margin foreign exchange.
      The media encouraged all to be property speculators millionaires, the media, does anyone trust them??
      This RE shake out will drag this whole nation down a hole for a coupla generations, I don’t know what then, but for me I’m safe in a life boat. WW

      • BubbleyMEMBER

        “The money to be made in the wreckage of a crisis is often more than you would possibly imagine.”

        True, billions were lost during the GFC but those who bought in when the ASX was at 3,300 made billions on the upswing.

        Or as Warren Buffett said “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”