Mortgage stress rises to new record high

Via Martin North:

Once again, it’s the continuing story of pressure on households as ongoing wages growth is not offsetting costs of living, and mortgage repayments as total debt continues to rise. Moreover, the trends have continued post the election.

Across Australia, more than 1,071,829 households are estimated to be now in mortgage stress (last month 1,050,450), another new record. This equates to more than 31.9% of owner-occupied borrowing households. In addition, more than 33,427 (30,413 last month) of these are in severe stress. We estimate that more than 70,502 (last month 70,149) households’ risk 30-day default in the next 12 month. This is as the impact of flat wages growth, rising living costs and higher real mortgage rates hit home.  Bank losses are likely to rise a little ahead…

Martin North, Principal of Digital Finance Analytics says that now the election results are known, and the dust has settled, we are still seeing the pressures on households are rising, thanks to an accumulation of larger mortgages compared to income whilst costs are rising, and incomes remain static.  Housing credit growth is still running significantly faster than incomes and inflation and continued rises in living costs – notably child care, healthcare costs, school fees and electricity prices are causing significant pain. Many households are depleting their savings to support their finances or are trying to refinance.

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 297,995 households in stress (284,014 last month), VIC 290,581 (292,114 last month), QLD 193,155 (184,037 last month) and WA has 140,950 (140,836) last month). The probability of default over the next 12 months rose, with around 13,222 (13,135 last month) in WA, around 12,948 (12,936 last month) in QLD, 17,773 (17,611 last week) in VIC and 18,822 (18,703 last month) in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.54 billion), though losses are likely to be highest in WA at 3.1 basis points, which equates to $1,107 million.

Comments

  1. It would be extremely helpful to be given the following definitions:
    1- Mortgage Stress
    2- Mild Stress
    3- Severe Stress
    – Many thanks

    • Is saying you’re suffering ‘mortgage stress’ the same as saying you have the flu when you really just have a cold?

    • 1- Mortgage Stress (you and the wife are too thick to do maths, and you left your financial decisions to be made by the bank)
      2- Mild Stress (bickering with the wife about how much each of you spends on takeaway coffee each day)
      3 – Severe Stress (wife leaves to shack up with Steve from accounts, who you once met at a works BBQ and you thought he was probably a swinger but a smart guy with lots of properties in Mount Druitt)

      • Point 3 would be a non stressful situation for me. Probably be rejoicing. Late night Maccas run with Scomo at Engadine after a big night at Northies.

      • I can confirm that Steve from accounts is not Nathan Birch, but he is a satisfied Bidvested client and paper billionaire.

      • Option 3 problem

        Unfortunately she will soon find that Steve from accounts is in a massive negative equity situation now,
        and still won’t buy takeaway coffees. When the banks mark to market he will be selling the Porsche…

      • Buuuuuuuuut Steve is hung like an Erickson Skycrane in water bombing configuration, and even if the impossible happens and he loses everything he’ll still have that going for him.

    • Strange Economics

      Realise this is a house price article,
      but If you add “rental stress” on the same percentage of income,
      you can add another 5 million Australians…
      So the specufestors cannot expect a rent increase or yield improvement (on the no more blood from a stone rule.
      They are not prospective FHBs then.

  2. “Many households are depleting their savings to support their finances or are trying to refinance.” This is significant. With lower central bank and mortgage rates (current and forthcoming), stressed households (not all) will be able to refinance at lower rates. This is a tremendous out card for bad financial decisions and investments. It’ll allow the can to be kicked down the road somewhat. A fire sale on desirable properties just got much further away. The bad debt can only work its way through the system if the government and central bank stop interfering in the market. But I know MB favours this debt price interference.

    • i think you’re misjudging the value of the P component of repayment v the I repayment.
      The savings is worth chickenshit, and people still own a mountain of debt on their depreciating land value, they they will spend the next 30 years struggling to clear, or sell out with negative equity. they are all screwed. lol. LOL BA HA HA!!!

      • Sort of. If we anticipate further central bank rate cuts and mortgage rates down at trough US levels (sub 3%) this is a big get out of jail card versus a revision to proper rates. It turns speculators into BBQ geniuses. There is so much institutional and political support for ever increasing house prices it isn’t even funny. They keep telling you what they’re going to do – increasing house prices to act as a debt financed low interest piggy bank for profligate consumer spending.

      • Savings is worth much as everything is getting cheaper…it also lets you sleep at night!

      • @ higgins, the savings I referred to was the savings on repayments due to the 0.25 cut.
        can $20 a week save anyone from mortgage default?

  3. Josh F was talking to himself on the tv last night. The magic of the rate cuts and lower income taxes will be magically spent by the masses on trinkets and takeout. This will boost the economy, wages and home prices. I think the majority will be so desperate that any extra cash will go against the increase tide of mortgage stress and the need for a multiple rate cuts will transpire as Josh seeks that magically uplift.

    This will be interesting to watch him avoid questions about economics and managing the economy. I saw ScoMo came out and blamed deteriorating global conditions yesterday – expect more of that excuse over the coming months.

    • I believe Mr F used the example of someone with a $400K mortgage being $60 per month better off as a result of the rate cut. Apart from the absurdity of a $400K mortgage being an average sort of thang that the average couple might have when their income might be $90K pa, $15 per week is a few coffees, or a couple of schooners of beer at my local pub, or one sixth of a tank of fuel for a mid to large vehicle, or the cost of a roll and a juice and coffee at my local café.

      If that’s expected to make a huge improvement in people’s lives and financial situation then he must know something that I don’t.

      • If the average mortage is $400k, I wonder who is buying these $1M homes in Sydney and Melbourne? I mean I’m seeing $1.5M-$2.0M prices being paid, so I’m sure most people don’t have large mortgages. 😀

      • Jumping jack flash

        That $400K mortgage and $60/month figure is a bit rubbery…

        I read this morning on news.com that it was a 600K mortgage and $90/week!
        If that’s correct and it wasn’t just the work experience kid getting the numbers wrong, $90/week is fairly significant. That’s a lot of $5.50 coffees. Not those $1 ones from 7/11 any more… no sir!

        Anyway, the details are irrelevant.
        As soon as the rate cuts kick in, that little line on that graph is going to turn and head downwards really quickly.

        Wages and jobs will shoot up, powered by cheaper and cheaper debt. Employers will just add 50% more staff, for fun, and raise wages by 20% across the board, all paid for with mountains of debt, simply because it is so cheap now.

        Its 2006 all over again!

      • @ Jack There’s a gummint sponsored mortgage calculator at moneysmart.gov.au. It gave the following results based on a $25 year loan with monthly repayments.

        $400K @ 4% = $2121/month over 25 years
        $400K @ 3.75% = 2067/month over 25 years.

        The delta is $54/month, which is close enough to $60.

        $600K @ 4% = $3177/month
        $600K @ 3.75% = $3095/month.

        The delta is $82 per month in the latter case.

        Based on those results, if someone’s claiming an extra $90/week on a $600K mortgage as a result of a 0.25% reduction in rates, I suspect that they may be making shit up confused.

      • Jumping jack flash

        undoubtedly!

        My point wasn’t the figures, they seemed wrong for sure.
        The point was the reasons the RBA stated for cutting rates – to stimulate jobs and growth and shore up confidence to meet their inflation target.

        The only way I can see that cheaper debt is going to impact on job creation and wages growth is if everyone simply borrows more to hire extra people and pay them more regardless of actual need/demand/any economic fundamental.

        Which obviously isn’t going to happen.

    • Torchwood1979

      This rate cut will just offset the out-of-cycle rate increases we’ve had over the past ~18 months. So a slight easing of pressure so that Torchwood’s household eats less into our sizeable buffer of savings but with my pay rises locked in at 1.5 and 2% respectively for the next four years there’s no way I’m spending a cent of it. I told Mrs Torchwood this and she just scowled, but I’m the responsible one when it comes to money so I win 🙂

  4. The only number that matters now in H2 2019 is unemployment. If it spikes nothing can stop the crash.

    • Watch out for the hungry seal..

      But employment in Australia is totally in the building industry now or FIRE – must be 20% of jobs related. Its a virtuous circle…

    • People working one hour per week are classified as employed … The stats are lies!

    • The other indicator I’m very interested in are Stamp Duty numbers – unlike auction stats I doubt the states will have any interest in fudging these. With volumes and revenue subsequently falling, I think we’ll see state Governments of both sides start to hammer the Federal government over funding issues.

  5. Jumping jack flash

    Early days yet.
    The RBA relief will kick in very soon.

    Just watch.
    Any minute now.