Rate cut fail: Mortgage stress keeps rising

Via Martin North today:

The DFA mortgage stress tracker to the end of July 2019 is released today. This is based on our rolling 52,000 household surveys and includes data up to the 31st July. More than 70,000 households risk default over the next 12 months.

Despite the two RBA rate cuts, and the tax refunds which some can claim, (after the legislation was passed in Parliament in July), the impact on household budgets with mortgages has yet to translate into a meaningful easing in mortgage stress. In fact, we doubt it will.

This is because the reductions in variable mortgage rates for existing customers have yet to work through the system, and the tax refund claims take some time to be processed. Meanwhile costs of living continue to escalate.

We also note that many households who have attempted to refinance to the much lower attractor rates and are in mortgage stress are being declined. In an absolute sense many of these households are locked into higher rates than the best available, and fall outside the revised (even if loser now) underwriting standards. We estimate there are more than 300,000 households who are mortgage prisoners as a result.

The total number of households estimated to be in mortgage stress in July 2019 is 1,808,000 or 32.1% of borrowing households. This is another record.

The RBA data to March 2019 showed that the ratio of household debt to income rose again to 189.7, and credit growth is still running at a faster rate than household incomes. And yet APRA reduced underwriting standards!

Analysis of stress across the country shows Western Australia still leads, but more households in New South Wales, Victoria and Queensland are under financial pressure.

We define households as “stressed” when current income does not cover current expenditure, including mortgage repayments. Households manage this deficit by cutting back on spending, putting more on credit cards and other loans, or try to refinance to a cheaper loan. Those in severe stress are deeply in deficit. It can take a household many months to slide from stressed to severely stressed, beyond this point, bank foreclosure or a forced sale in more likely.

We note that households in this severely stressed state are now much more likely to be forced to sell, as bank hardship schemes only protect households for a period. We note that in some post codes in Western Australia, where this has been an issue now for some time, defaults and foreclosures are running at three to four times the national average.

We also continue to see stress breaking out across most of our household segments, this is not just a factor running in battling households. Indeed, banks have been treating more wealthy groups very generously in terms of loan amounts, because they have other assets (even if they are also mortgaged). Risks in the affluent groups are rising still, and as the share market reverses, this will become significant.

Stress does vary across the regions.

And finally, here are the top post codes in terms of mortgage stress.

WA postcode 6065, the area around Tapping and Hocking has the largest count of stressed households this month, followed by Cambelltown in NSW 2560, Toowoomba in QLD 4350, Liverpool in NSW 2170, Ballarat 3350 in VIC and Narre Warren in VIC, 3895. All these areas are locations where there has (and continues to be) considerable new construction. Many households purchased close to the top of the market, and are now experiencing negative equity, with prices in some locations down more than 30%. Some were first time buyers, others traded up to a new property.

We will discuss the drivers of stress when we publish the next edition of our surveys, but we note that households are reporting significant ongoing rises in fuel costs, child care costs, healthcare costs (especially health insurance), school fees, and local authority rates. In many cases any relief from lower mortgage rates is blotted up by other living costs. The truth is only significant increases in take-home pay would alleviate their financial pressures, but in the current situation, this is unlikely.

Finally, as I often say, many households do not maintain a household budget, so they do not know their true financial position. This is an essential first step to managing financial issues. The ASIC Money Smart Web site offers some useful tools.

Next, it is important to prioritise spending, and avoid using high rate credit cards. Pay these off first.

Third, if households are getting into difficulty financially, its important to act early, rather than hoping things will work out. And Banks have an obligation to help, to talk to them. So talk to your lender.

Judging by the shifts on the index, it looks like mortgage stress has more to do with weak wages, macroprudential policy and high utility bills than it does the cash rate, unless there is a really big move.

David Llewellyn-Smith
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  1. The Horrible Scott Morrison MP

    People lie in surveys, especially when they get the chance to make out they’re victims. Also, successful people don’t have time to fill in surveys.

      • I think it was Kochie, when asked for the best wealth tip, who said “Don’t get divorced”

      • I know a couple of guys who got completely cleaned up by their other halves. Literally the judge gave the ‘other half’ everything but the shirt on their backs. Oh, that’s everything plus a cut of all future earnings. I nearly shed tears listening to one guy’s story — nicest bloke in the world. His ex-wife’s behaviour on the other hand was shocking – she’d been [email protected] someone else in the lead-up to dropping the D-bomb on him. He had no idea. She claimed it was he that was having an affair, had subjected her to all sorts of abuse etc. Strange world we live in.

    • Mining BoganMEMBER

      It’s the suicide rate that goes up before divorce. Lovey loses the dream life, blames Hubby for the economy tanking, grabs what she can plus kids and Hubby ends up wandering down to the chook shed to blow his brains out.

      Watched this happen so many times.

  2. Saw good ol’ Boy Senator James Patterson on 7.30 last night saying how concerned he was that wages weren’t growing as fast as the Liberal Party would like. Thankfully I didn’t have anything in my hands otherwise a projectile would’ve hit the TV at a visit-to-JB-HiFi speed.

    • that was just a slight slip of the tongue he was meant to say ‘falling’ not ‘growing’, i mean it would look very silly and contradictory if he said ‘growing’ when the liberals have done everything they can to suppress them.

      • Jumping jack flash

        I think we’ve simply changed governments and leaders too many times since 2007 and nobody, through the ages, was filled in with what the “current plan” was.
        And that’s pretty normal. I know if I was forcefully losing my job, my entire handover document would be – “work it out yourself like I did”.

        The original plan back in 2007 was to lower wages. So they leaped into action and made it happen.
        Now they want to raise them again, but apparently nobody can remember what they did to lower them.

        But the other thing they need to contend with now, is the cheap workers that were used to lower workers’ wages back in 2007 are now used by the top echelon to continue to raise theirs! What a quandary.

  3. Complex Carbon Unit

    Money is tight in the aria I live in, every time petrol prices rise the roads are really quiet even on a Friday, it’s grouse I love it can get one of my Yankee cars out and go for a spin with the big 440 magnum under the hood… don’t have to keep looking for some idiot in a SUV doing the wrong thing or on their noble phone…

  4. John Howard has come out to say interest rates cuts have gone too far. And MB has a brain explosion.

  5. In an absolute sense many of these households are locked into higher rates than the best available, and fall outside the revised (even if loser now) underwriting standards. We estimate there are more than 300,000 households who are mortgage prisoners as a result.

    I can’t tell if this is deliberately misspelt to partake in MB nomenclature? Since “looser” and “loser” interchangeable these days :P.

  6. In an absolute sense many of these households are locked into higher rates than the best available, and fall outside the revised (even if loser now) underwriting standards.

    LOL at the reverse irony in the substitution of ‘loser’ for ‘looser’

    I wonder how much money the banks will ‘loose’ when this all ends in tears, as it surely will inside 18 months.

    • Jumping jack flash

      Banks won’t lose anything – they have LMI.
      It is the people who will lose as we plunge into austerity after bailing out the banks – the masters of the economy.

    • The Horrible Scott Morrison MP

      Yes it’s been going to surely end in tears in the next 18 months for the past 18 years. There’s a property crash on the first and third Tuesday of every month.

  7. The mortgage stress line kicked into high gear at about the same time a lot of loans were converting from interest only to principal and interest.

    The Royal commission into banking was also starting up and the banks suddenly got responsible.

    Doesn’t seem like a coincidence to me.

    • Yeah but also 2017 is peak Johnny Foreigner buyer too. They started to disappear at the same time, a perfect storm. Since these guys were pushing prices up and bailing out the over-leveraged.

      • “One drop of water does not believe it caused the flood”

        Its always a confluence of events that causes a disaster and you’re right, the loss of foreign cash is a factor.

    • I think Martin will need to significantly increase the axis on this chart as unemployment goes from 5% to 7% over the next 12 months.

      • A person who does 1 hour of work a week is considered employed.

        The numbers are so heavily manipulated that its impossible to work out what the true rate of unemployment is.

  8. Jumping jack flash

    Stands to reason.

    Lowering the cash rate, of which only part was passed on, did not remove the necessity for everyone to take on enormous piles of debt to be successful.

    It also didn’t remove anyone’s debt.

    It didn’t change the fact that debt needs to be repaid in full plus all the interest…

    The only thing that changed was the interest bill was the tiniest of tiny bits smaller.

    Since it didn’t remove the necessity for everyone to have enormous piles of debt, the gougable items such as essentials, continue to be gouged – wages gotta rise (for the lucky few). To be able to take on as much debt that is required is incredibly important.

    Since it didn’t remove anyone’s debt, those with enormous piles of debt, after gaining the full benefit of the part of the 0.5% cash rate cut that was passed on, still have to service their enormous debt pile.

    But, good times people, good times: the tiny, tiny cut to the mortgage rate gave every debt slave an extra $10 or so a week. This surely will revitalise the economy and create the wage inflation and the extra jobs! We’re saved! Its 2006 all over again!

    Debt is also cheaper than ever, it is the tiniest of tiny bits cheaper than it was before. Might as well call it free now, right?
    We’re well on the right path to get an extra 7 trillion debt dollars in the system by 2030, and economic prosperity! Go you good thing.

    Those enormous brains on legs that studiously and carefully govern the economy with an iron finger, and an iron will behind it, are on the job. We have nothing to fear.

  9. No severe stress in ACT & Tasmania, a little hard to believe, probably too low sample size

    • The Horrible Scott Morrison MP

      I’m telling you, people are getting their kids to fill these surveys in for them. Don’t Martin and his little gollum notice the crayon?

  10. Very surprised to see Perth postcode 6018 listed – wealthy western suburbs area. Supposedly.

    • Observed that myself when previous stats were released. But parts of Karrinyup, Gwelup and Innaloo aren’t that wealthy. Plus bound to be people buying at the top of the market and now carrying the can