Mortgage stress booms as property crash deepens

Digital Finance Analytics (DFA) has released its February 2019 mortgage stress survey, which reveals that the pressure on Australian households continues to grow, weighed down by weak wages growth, growing debt burdens, and plummeting property values:

Unfortunately, the pressure on households continues to rise as weak ongoing wages growth is not offsetting costs of living, and mortgage repayments and total debt still grows. In addition, the number of households in severe stress continues to rise, suggesting a lift in potential defaults later.

The latest RBA data on household debt to income to September fell a little to 188.6, but still remains highly elevated. The housing debt ratio continues to climb to a new record of 139.6, according to the RBA.  This shows that household debt to income is still increasing.

This is confirmed by the latest financial aggregates recently released by the RBA, to end January 2019, with owner occupied lending still growing significantly faster than inflation at 6.2%.

This high debt level helps to explain the fact that mortgage stress continues to rise.

Across Australia, more than 1,036,214 households are estimated to be now in mortgage stress (last month 1,026,106), another new record. This equates to more than 31% of owner occupied borrowing households. In addition, more than 28,903 of these are in severe stress (last month 25,750). We estimate that more than 66,000 households risk 30-day default in the next 12 months, up 3,000 from last month. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.  Bank losses are likely to rise a little ahead.

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 the end of February 2019. 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.

Despite the oft repeated view that household finances are fine, the continued accumulation of larger mortgages compared to income whilst costs are rising and incomes static explains the issues we are now seeing.

Housing credit growth is running significantly faster than incomes and inflation, and continued rises in living costs – notably child care, school fees and electricity prices are causing significant pain, this despite some relief at the bowser. Many continue to dip into savings to support their finances.   We are seeing a rise in households seeking help with their finances, including access to debt counsellors and other advice channels. WA is seeing very strong growth in cries for help, but pain in NSW is also on the rise.

Indeed, the fact that significant numbers of households have had their potential borrowing power crimped by lending standards belatedly being tightened, and are therefore mortgage prisoners, is significant. “More than 40% of those seeking to refinance are now having difficulty. This is strongly aligned to those who are registering as stressed.  These are households urgently trying to reduce their monthly outgoings”.

The next question to consider is which households are being impacted. In fact, negative equity is touching “lots of different segments” of the market for different reasons, but collectively it is an “early warning sign” for what is to come.

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.  This is shown in the segment analysis below:

Stress by the numbers.

Regional analysis shows that NSW has 286,469 households in stress (282,165 last month), VIC 278,091 (278,860 last month), QLD 185,424 (185,493 last month) and WA has 139,142 (139,621 last month). The probability of default over the next 12 months rose, with around 12,500 in WA, around 12,100 in QLD, 16,800 in VIC and 17,700 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.49 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 3.3 basis points, which equates to $1,048 million from Owner Occupied borrowers.

A fuller regional breakdown is set out below.

And here is a list of the highest count of stressed households by post code across the country.

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  1. No stress here in SE QLD. It’s boom time. My once quiet suburban neighbourhood continues to expand upwards, the numbers of exotic faces appears to multiply by the week and the traffic is out of control at rush hour.

    Inter-staters are piling over the border and vibrants are too, it seems. Feels like a last desperate surge. Please, please bring on an economic depression.

    • CaptainFeatherSwordsGhost-TheHaunting3

      SE QLD is always behind Sydney and Melbourne……but fear not, prices are beginning to turn down so the next 12 months should be fun

    • China PlateMEMBER

      what’s the difference between an “exotic” and a “vibrant”.
      just a general question to all not solely directed at you Dom.
      i used to use exotic a fair bit but it fell out of my vocabulary some time ago, not sure why.

    • boomengineeringMEMBER

      Talking to a Nora Head local and he said cheap houses were rising in value as more competition for starter homes when failing to get finance for middle cost homes.

      • My observations are that this is real.

        It will last only as long as middle price suburb sellers can HODL. Once they drop their prices and those lower prices are locked in, then there is less reason to buy at the “cheap” end and that demand will then go lower too.

    • Bollocks there are more mortgagee and distressed sales on the Gold Coast than anywhere else…total BS

      • DominicMEMBER

        That’s the Goldie for you — never changes. Full of weirdos and deadbeats.

        I was really talking about Brisvegas, fella.

      • Brisbane too is full of Mortgagee and desperado sellers go and have a look at the poxed map of RE dot com.

  2. This information suggests that mortgage stress is very high at the moment. Really? I mean, things are only just getting started with a slowdown in the ecomomy. No real effect at this stage.

    If we currently have >1m “stressed” and around 30,000 in “severe stress”, what do you call the level of stress that comes when unemplyoment goes up by 2% or 3%?

    • I remember well the recession in the late 80’s and early 90’s. In both cases unemployment went above 10%. Things were tough, but most people were able to battern down the hatches, watch their pennys, use some reserves, and ride it out.

      I always associate the word “armageddon” with fear mongers, however with the level of consumer debt in Australia today, I fear this could be an accurate description.

      • boomengineeringMEMBER

        Wish that were true for us .Armageddon would have been better as everyone would have been in the same boat.

      • +1, I see no way out with the level of complacency and lack of savings most punters have.


    But, but, but I’m pretty sure the loan bloke said that if the property I bought went up in value, it was money for old rope.
    And if it went down, the loan would ‘adjust’ to stay at 80% of the property market value.

  4. Using APRA data and house prices my chicken stretches suggest insolvency is already significant and will explode if prices fall another 10%. This analysis strikes me as spot on.

    RBA & Co are delusional if they think they can engineer an inaccurate correction in house prices.

  5. The Big Short has started…
    Suncorp may not repay a residential mortgage bond of A$120m to all investors after a tranche reached a rate of 3% of borrowers more than 60 days overdue on their mortgage, The Australian reported, citing the Queensland-based bank.

  6. Interesting to see 6018 join the mortgage stress top 20. Some of those suburbs are nice, some of it dodgy ie Scarbs.

    Interesting to see it starting to really drift into the nicer suburbs in Perth and not just the FIFO and FHB belts.

    • Wow. Yes. I grew up there. That is an area people might actually want to live in.

      I suppose Innaloo would be the weak area of 6018?

    > in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US, with the remainder invested in financial assets.
    > roughly 22% of China’s urban housing stock is unoccupied,
    > One apartment owner said the new prices suggested the value of the apartment she bought from the developer in March had dropped by about 17.5%.
    >“There are people who bought multiple homes who are now trying to sell one to pay off the mortgage on another,” said Ran Yunjie, a property agent. One of his clients bought an apartment last year for about $230,000. To find a buyer now, the client would have to drop the price by 60%, according to Ran.

    it gets worse 🙂

    In any case, the fact that China’ largest property developer is now slashing prices across the board by as much as 10%, means that a deflationary hurricane is about to blow across what most see as the most important sector in China’s economy, and worse, should other property developers follow in slashing prices launching a race to the bottom, nobody knows how far prices could truly fall should a liquidation domino effect ensue.