Bugger rate cuts. Mortgage stress hits new all time high

Via Martin North:

After talking a breather last month, thanks to rate cuts and tax refunds (minimal those these were in practice), the results from our surveys for October shows a further 70,000 household fell into stress taking the total to more than 1.77 million households or 32.2%

Household debt is at record highs, and while costs are still rising, incomes are not in real terms. There was a spate of refinancing which helped some households but the bulk of these were NOT in stress in the first place. The rejection rates for those in mortgage stress are and remain consistently higher.

Mortgage stress is assessed on a cash flow basis, where, based on our 52,000 household rolling annual survey we measure income and outgoings for households, including mortgage repayments. Where the cash flow is net negative, households are in stress. They are required to draw down on savings, put more on credit cards or hunker down – one reason the retail sales data yesterday at o.2% in September was so weak. Stress is based on current circumstances.

We also model the probability of default ahead over the next 12 months, which is a predictive estimate and we expect defaults to continue to rise – we are seeing worrying signs in both New South Wales and Victoria now as economic conditions in these states weaken. Job losses in retail and construction are leading the downturn. But underemployment is widespread. On the other hand, Canberra, with higher public sector wages, is more insulated from the reality elsewhere.

Across our household segments more than half (56.5%) of Young Growing Families are in stress, accounting for more than 166,000 households; followed by Battling Urban at 48.9% or 76,000 households and Disadvantaged Fringe at 48%, with nearly 300,000 household. Rural households are under pressure thanks also to the drought, with 25.6% in mortgage stress, or 78,500 households and even the most affluent segment – Exclusive Professionals are 24% in stress with 54,600 households. In other words mortgage stress is appearing in every sector of society.

Across the states the highest proportion of households in stress are located in Tasmania (39%) and Northern Territories (36.9%), although the number of households is relatively low. New South Wales now has nearly 300,000 households in difficulty or 28.3% of households, and Victoria has 296,000 households in stress or 33.1%. We have been tracking the spike in Victoria in recent months. However, Western Australia has 34.3% of households in stress, or 145,000 households and conditions continue to deteriorate there with more foreclosures in train, as banks speed up their resolution processes.

We analyse stress to post code level, and can identify those postcodes with the largest count of stressed households. Post code 2560 – the area around Campbelltown has the highest count, with 7,300 in stress or 63% of households. Next is Melbourne post code 3805, including Fountain Gate and Narre Warren with 6,600 stressed households representing 57.8% of households. Third is Toowoomba in Queensland with 6,500 households, representing 44% of households in the district, and fourth is 2170 around Liverpool in New South Wales with 6,300 in stress or 44.8% of households. A common characteristic are areas of high urban expansion on the fringe, with many new builds competing with existing property, and many recently purchased. That said, stress can take several years to emerge, and there are pockets of pain from purchases made several years ago.

Finally, we also examined the expense drivers of stress from our surveys. These vary across the segments with power prices, school fees and child care, all significant, as well as housing costs overall.

This is likely to drive stress higher unless real wages start to improve, but given the current economic outlook that appears unlikely for now.

Sooner or later households will need wages growth or the system will grind to a halt. Yet the mass immigration economy that is needed to support asset prices cannot deliver it.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Badlands.

    I worry about our LTI of 3.3/LVR 58% (safe/secure permanent job) so don’t know how everyone else is going at the margins

    Brother is permanent firie, wife on maternity leave with 3rd, half pay, he is considering 1 day a week cash chippy work @ 50/hr to make ends meet

    • They generally have plenty of time for a second career on the side. A mate is an electrician and runs his business (employing two others), whilst working full time for the MFB. Has done so for two decades. Will be well shielded if this 30-40% downturn in residential construction hits.

  2. If that data is sound then a recession could really open the forced-sale flood-gates. What then from Scummo and Co? Taxpayer funded mortgage assistance? Don’t rule it out.

  3. Jumping jack flash

    “Sooner or later households will need wages growth or the system will grind to a halt.”
    The days of “households” read: workers, getting wage rises are over.

    We seem to be in a bit of a death spiral with regards to wages and spending and debt. Usually debt is used to break the cycle when wages aren’t enough, but as at right now, everyone seems to have had enough debt.

    Maybe the government should implement a UBI to try and break it? Even though I’m not necessarily a fan, it seems that not only are wages not enough for the average worker to be successful from, wages plus an enormous pile of debt isn’t enough now either.

    “Yet the mass immigration economy that is needed to support asset prices cannot deliver it.”
    Even though “households” can never get wage rises again while there is so much debt sucking money out of the economy, and any spare wage capacity is stolen by whoever can grab at it first after which it is promptly used to obtain or repay debt, I believe that if our veritable sea of slave-level workers eventually receive a semblance of a fair wage they may be able to take on debt and keep the debt flowing – which would be a good thing for an economy such as ours that needs a constant flow of new blood to take on debt to power the economy to new heights… but the problem is, where is that initial wage capacity injection going to come from to get the ball rolling?

    Wage capacity can’t be just created from nothing. If it could we’d all have stonkingly high wages right now and there would be no problems.