Mortgage stress rockets to record high

Mortgage rates may have cratered, but mortgage stress has lifted to another record high with 1.1 million households now under stress, comprising 32.7% of borrowing households. From Martin North:

We are releasing the results of our rolling household surveys, which were completed before the latest round of bushfires started raging. Nevertheless, the results are a concern because the total number of households registering as financially stressed rose again, to 32.7% of borrowing households. This represent 1.1 million households across the country and a predicted default count of 83,220, despite lower cash rates, and some deeply discounted mortgages.

Stress is assessed in cash-flow terms, and when money in is not sufficient to cover the costs of the mortgage and other regular outgoings, the household is flagged as stressed. Granted they may have the capability to tap into deposits, pull down on credit cards, or even sell property, but on a regular basis they are in strife. We find a significant gap between those we assess as at risk, and those who believe they do have financial difficulty. Many adopt the head in the sand approach and hope things will improve, but given the current economic outlook, we think that is a courageous stance to take.

The RBA reported their E2 Selected Household ratios to September just before Christmas and weirdly, the entire debt to income ratio series was restated lower, not just the current quarter, but back through the series. As a result the average debt to income ratio dropped from 191 to a still high 186.5. We always have a issue with this series because it includes small business and households without borrowings, but the downshift in the series is quite significant, and unexplained. I have written to the RBA asking for an explanation. Note this is not the first time the series has been revised down, yet they do not include any explanation in the dataset.

Across the states, NT, SA and TAS recorded the highest proportion of households in difficulty, though WA has the highest default probability risk over the next 12 months at 4.2%, whereas the three most populous states, VIC, NSW and QLD sat at 2.2%. Victoria proportionally to New South Wales has a higher mortgage stress reading.

Among the DFA household segments, 57% of young growing households are in mortgage stress, and within this group there is a large cohort of first time buyers. 2.5% of these households risk default in the next 12 months.

47.5% of battling urban households are also in mortgage stress, and 1.7% risk default ahead. Many of these households occupy properties in the urban fringe, often on newish high density estates. The largest cohort is the disadvantaged fringe group, with 300,000 households in stress and 13,00 risking default. Stress continues to build in our more affluent segments too, with young affluent households at 11.3%, or 4,400 households and exclusive professionals at 21.5% in stress and 3.4% risking default. Losses from this exclusive group are expected to be as high as $1 billion dollars, and is the most value exposed group from a lender perspective.

While mortgage rates have cratered, actual debt repayments (comprising both principal and interest) remains high by global standards, running well above other English-speaking nations:

Despite the massive interest rate cuts experienced over the past decade, Australia’s debt repayments are little lower today (15.6%) than it was at its absolute peak (17.5%) in June 2008, just prior to the GFC.

This has left Australian households in a precarious position as the RBA cash rate hits its absolute bottom and income growth stagnates.

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

    • Jumping jack flash

      We can only hope.
      They will do anything to prevent it though.

      2 trillion dollars is an insane amount of money
      100 billion dollars of interest paid every year is ridiculously huge, and it is only able to be supported through additional debt creation to alleviate the enormous drain this represents on the productive economy.

      It would be a different story of course if that 2 trillion dollars had been used to build and extend productivity, but no, it was wasted on nonproductive houses.

  1. Are the fires going to be Australia’s black swan? (Cooked well and truly at that). Hard to be upbeat atm.

    • at this stage house prices are only supported by confidence, the question is how weak it is …
      if we get big rain in next few weeks I doubt most of people will remember bushfires in few months

    • Hasn’t an unexpected demand for housing come out of this bushfire disaster?
      It’s a bit like the Christchurch earthquake; those displaced have to live/buy/rent somewhere and the only question to be answered is “Who pays and how much?”

      • Yep. I know it was only a weird Canberra situation, but the Canberra market went up so much after the 2003 bushfires that people who had, say, a crappy 1970’s house burnt down were able to completely fail to rebuild, then sell the empty block of land for $1m a few years later. The original house might have only been worth $300,000 or so.

      • Christchurch earthquake did that via demand growth pushing GDP growth – demand to rebuild the town

        bush-fires are different, firstly they are disruptive so they tend to reduce economic demand (agriculture, tourism, smoke, ), due to long lasting nature and probable human causation they are affecting confidence nationwide, and finally the actual demand for rebuilding is quite small (“only” 2000 homes vs 15000 thousands destroyed buildings in Christchurch plus numerous to be fixed)
        also in many areas affected by bushfires more than 1/3 of homes were holiday homes which will likely be rebuilt very slowly

    • China PlateMEMBER

      The heat is on in more ways than the obvious ATM
      Tell me can you feel it.
      Or perhaps floyd had it right after all
      “too many home fires burning and not enough trees”

  2. happy valleyMEMBER

    Fixed interest income reliant retirees and savers are not under stress – they’ve been killed off.

  3. Flammable Cladding

    MN reporting rising levels of mortgage stress must be a real thorn for the RBA and Scummo. Ditto his eagle eye picking up that economic revisionism in the debt to household income series. That Potemkin chart fiddling speaks volumes to me about how much the politburu wants to cover up the impending economic train wreck by keeping the average punter analyst in the dark as long as possible.

    If I were MN I would be checking the brake lines on the car at least twice a day.

  4. happy valleyMEMBER

    Scotty from Marketing, Josh Rainbowberg and the RBA happy clappy angels of death (for savers) to the rescue next month with another cash rate cut – the cure all.

    • Yes, and those gates need an excavator to lower them some more to squeeze extra vibration into Tarneit and Blacktown.

    • C.M.BurnsMEMBER

      I’m confused. You said you didn’t hire people in December. Don’t tell us that you self-service through the summer ?

  5. TailorTrashMEMBER

    Need to plot the price of food post bush fires on that mortgage stress chart ……suspect food prices are going to pull it up further ..,,you can’t eat a property ladder

  6. HadronCollision

    I think I saw Kempsey yarded 2000 (!!!!) head this week into good prices (reportedly looking good but many missing real guts). The North Coast prices are holding up despite the drought. We offloaded our last head at around 2.50/kg before the dash of rain a few weeks ago.

    With all this lost stock, once the rain comes to the Mid to North Coasts (and QLD), the beef prices may take a very big run (I remember getting some offloaded for 3.50 in the last run). There’s going to be some serious money sloshing around for those producers with decent stock.

    Any cow eaters may need to prepare for some much higher prices.

    Probably same for lamb?

  7. If you have around 500k loan and your interest rate over the past couple of years has gone from 4.6 to 3.1% its around $100 per week extra in your pocket. Private health, school fees, energy bills probably taken that and some… fun times indeed for the punters.

    • Not too mention the collective ~$100 per week taken out of the pockets of savers….
      Good times ahead! 1.6% will sort out all the problems…..

    • 500k loan in Sydney is the minimum I have seen amongst friends.
      Food, water and oil prices are going to rise sharply this quarter.

      • 500k LOL. Where’s that for Wetheril Park or Bankstown. That’s your 2 run abouts in Mosman.

  8. This is why the powers that be can never allow another recession because literally the whole
    Country will go broke.

    Household debt won’t trigger a shakeout but it will make one 1000x more severe when it comes.

  9. This is all so silly, everyone that thinks about this problem for more than a nanosec realizes that there is only one solution.
    Higher Real estate prices.
    Everything is fixed if we can only engineer an environment where RE prices once again start doubling every 7 to 10 years.
    Everything is F’ed if we can’t engineer an environment where RE prices once again start doubling every 7 to 10 years.
    Sooner of later this foolish game ends but we’re not there yet, not by a long shot, things need to get really bad before average Aussies loose the only faith they have.
    They don’t believe in the community, they don’t believe in any particular religion, they don’t believe in the next generation, Aussies don’t believe in any of the things that made this country great but they do believe that RE doubles every 7 to 10 years.
    That belief goes to their core, that’s a belief they’ll die with, and probably die for…like I said we’re not there yet, so let the 2020 RE party begin, I’ll bring the Jello shots!

    • Jumping jack flash

      THIS!!

      More debt will fix things. These problems are obviously being caused by a shortage of new debt. Debt is inflating at a pitiful 2.5% while the average interest rate is powering around 5% despite the cash rate cuts. That’s the problem right there. Debt needs to inflate faster than the interest rate so the new debt can be used to pay the interest of the old debt.

      The cause of the lacklustre debt party attendance is of course that onerous cover charge to get in, that 5% deposit when wages have remained stagnant (due to all the debt, and the necessity for more debt) for the past decade.

      Lower the cover charge to 0%, or get ScoMo to pay it, and the debt party will take off again.
      I guarantee it.

  10. Jumping jack flash

    Mortgage stress is also impacted by “mortgage fatigue”. After all it is a subjective measure.
    When does anyone ever say they have enough money to “get by”? This is why debt is completely necessary.

    After about 5 to 7 years of the drudgery of repaying a 30-year mortgage; the obvious repairs, the decay, the dissatisfaction with their original purchase, the ongoing stagnant wages, the ever-climbing costs of living (absolutely necessary to create more debt).

    These hopelessly indebted people could feel generally more stressed and attribute that to their mortgage, when in fact they are more or less in the same financial situation they were in 5 to 7 years ago, except back then they had a shiny new house to be excited about.

    • TailorTrashMEMBER

      Yes indeed ….
      …back when ah were a lad with Pand I mortgages at least used to see the principal sinking over time and the painful interest component fading as well. These new I only and extended time mortgages must be soul destroying….

      • Jumping jack flash

        Back in ancient times, when debt was carefully controlled and only given out in tiny amounts after much deliberation and analysis, and interest rates were a reflection of risk – based on the general health of the economy, [and no economist or banker in their right mind would dare think of manipulating interest rates to control the health of an economy because they knew better], a bank would only give a tiny amount of the total price of a house. Less than 50%. This amount could be repaid quite quickly, in several years despite the relatively high interest rates. Nowhere near 30 years was required.

        But the difference was that house prices in those ancient times of yesteryear were such that one could save up most of the purchase price from a single, modest income over several years. (and businesses could still remain globally competitive paying those wages)

        Flash forward to now, the “days of debt”, and it is simply IMPOSSIBLE to purchase a significant part of a house (usefully located and all the rest, etc etc etc) on even relatively high dual incomes, so we scrape together just 5% of the ridiculously high price over several years, and then ask the bank for the remaining 95% – a soul destroying amount of debt indeed.

  11. Overall, who does the push for higher house prices really serve?

    If prices fall, the only pain is really to those that recently bought, but that isn’t a significant cohort compared to those that bought years ago or those hoping for lower prices such as first home buyers.

    Boomers who bought cheap decades ago are just being greedy salivating at higher prices – but what does it really matter, unless you are going to cash out and buy again somewhere cheaper.