Negative equity threat as home owners “sleepwalk into disaster”

Research undertaken on behalf of the Finance Brokers Association of Australia shows that an official interest rate rise of just 1% would be enough to push many homeowners into mortgage stress.

The survey found that 57% of respondents would not be able to meet a $300 increase in their rent or monthly mortgage repayment. FBAA MD Peter White warns that an interest rate rise is inevitable, while many people could end up with negative equity if there is a correction in the housing market:

“Many Australians are clearly on the brink and are sleepwalking into disaster, living in the false hope that rates will stay this low.”

He warned that “the housing market has soared and there is a reasonable chance will undergo a correction, meaning that those with low deposits who have stretched themselves to make large repayments could see themselves with negative equity, owing more than the value of the property. Add a mortgage increase they can’t pay, and there could be a lot of people in real trouble”…

“This survey is a wake up call and shows that even a small rise in rates – which is looking more likely next year with rising inflation – could be catastrophic for our nation.”

Separately, the Daily Telegraph reports there are currently 343 locations across NSW where repayments on a mortgage at median house prices would eat up more than a third of the average household income, which would swell to 400 suburbs if rates rose by 1%.

Warnings like these prop up every housing cycle whereby we are warned that thousands of people will be thrown into negative equity.

On an aggregate level at least, mortgage holders are in good shape. Households have accumulated record amounts of savings on the back of stimulus and debt repayments as a share of household income are at relatively low levels:

Debt repayment burden

This suggests that most households should be able to withstand a 1% of rise in mortgage rates.

That said, there will always be mortgage holders at the margin that are badly exposed to rising mortgage rates. And we have just seen the proportion of mortgages issued at high debt-to-income ratios soar:

I am still not convinced that mortgage holders are facing a near-term sharp rise in rates.

The RBA has explicitly stated that interest rates will not rise until inflation is sustainably within its 2% to 3% target range. It has less explicitly explained than it does not expect this to occur until there is wages growth of at least 3% across the economy. Thus, the trigger for the RBA to lift interest rates will likely hinge on wage growth, which we will receive data on tomorrow.

We know that policy makers are itching to reboot the mass immigration program at the earliest opportunity, which would crush wage growth (and therefore inflation). We also can expect commodity prices to tank next year (crimping national income and the federal budget).

Thus, rather than be alarmist on inflation and interest rates, I am far more cautious and believe in a ‘wait and see’ approach.

Sure, we sill likely see some imported (cost-push) inflation from supply chain bottlenecks and energy. But the RBA will likely look through these impacts when determining rates, since they are likely to be transitory. There is also little point in raising rates (a demand management tool) to solve an imported supply-side shock.

That said, fixed mortgage rates are already rising, which should crimp property demand even if it does not impact existing borrowers that have already locked-in low rates.

Unconventional Economist
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  1. pfh007.comMEMBER

    The LNP desperation to restart our “slave” ….sorry I misspoke ….”skilled” economy is reaching fever pitch with all their preferred lobby and industry groups joining in the drumming like a tree full of cicadas in the first heat wave of summer.

    Where are my noise cancelling headphones!

    • they’ll win with this kind of cool jawboning. negative rates in feb, +40% prices over 2022. scummo back in (on eating the young, a popular hobby). convert gas pipes to oil instead of reclaiming desert with desal water, suck out SA/WA fields. win. until it don’t.

  2. A very logical analysis of an exceedingly Illogical market….who knows one day you might be right, in the mean time I’ll trade RE momentum just like all good Aussies and naturally expect to be bailed out if I’m wrong.
    Just out of interest, who do you think will be there to bail you out if you’re wrong?

  3. This survey is a wake up call and shows that even a small rise in rates – which is looking more likely next year with rising inflation – could be catastrophic for our nation.

    If a small rise in interest rates would be “catastrophic”, what would a major war do?

    Any nation that could suffer a catastrophe due to something as fundamentally trivial as a small rise in interest rates is so brittle and worthless as to no longer deserve to be called a nation.

      • Yep, clear message about household vulnerability. Correct too.
        I still haven’t seen a recent informed opinion on an exit strategy; my uninformed opinion includes jubilee – the Government has created this hazard and should own the moral hazard that goes with that solution. I recall that pfh wrote on how this can work. Can’t signal it though because that is an avoidable hazard.

          • I think Pfh had a how to for that

            Credit every mortgage holder with whatever amount is decided. Must be paid off mortgage, mortgage value (loan value/limit must decrease by commensurate amount so people can’t just withdraw equity)

            Looser renters who are waiting 18 (more) months (TM) for super negative sideways movement get the cash as a reward for being looser renters

      • A bit like the cries for help last year that house prices were going to fall 20-30%, and resulted in policies that increased house prices by 20-30% instead.

        I can also see it with the calls for armageddon if immigration floodgates are not opened. We can’t hire anyone at all….who is willing to work a 60-hour week at well below minimum wages.

        • Arthur Schopenhauer

          It seems that house prices cannot be at a steady state. They are either going up or going down.

          Staying about the same for ten years, while inflation returns them to sanity might be a strategy, but not possible.

    • Maybe they had a FBA bbq on the weekend where during some boozy bragging and one-upmanship they discovered that the industry had written far more liar loans than they had previously realised or admitted?

      • Agreed!
        When that chilly and unexpected squall comes across Bondi followed by the rain, the beachgoers scamper away with amazing speed. And the ice cream vendor says to himself, “that’s it for today”!

    • Its a PUFF PIECE that they hand out to media to gain traction and public sentiment that IR should not rise because it will create so much pain. It’s cleverly disguised as a genuine concern.

  4. Goldstandard1MEMBER

    “I am still not convinced that mortgage holders are facing a near-term sharp rise in rates.”

    Rapidly declining FOMO without expectation of rising prices is enough my friend. Also, rising rates are actually coming.
    Wait until ppl realise the virus isn’t going away and the borders remain shut and supply chains continue to be broken because lock downs are still a thing in China/Asia and Europe. That will really scare ppl.

    Calling housing peak (which the data we’ll see in February 22).

  5. Costs A$1.2m to buy a 1 bedroom unrenovated 45sqm apartment in Chelsea UK.
    Want a bit more space? A 2 bedroom unrenovated 60sqm will cost A$2m
    No parking of course.
    Only got A$600k? That should get you a lovely 20sqm studio.

  6. The survey found that 57% of respondents would not be able to meet a $300 increase in their rent or monthly mortgage repayment.

    Who did they survey? People in the Centrelink queue?

    • +1 Which would shift the majority of that under stress group out of that situation very quickly. If it became a threat to national economic growth or stability the govt could also push for loan terms to be automatically extended by any IO period granted, thereby negating the future cash flow issues on IO expiry.

      Not the worst debt management strategy in a period with actual inflation (if that is to be the case).

  7. FYI, I don’t know about the other banks but Macquarie test at 5% above their interest rate.
    At the moment they are testing at above 7%
    Even if you take a loan at 3x income, 60% LVR they income check and verity earnings and also check general expenditure.
    I found this quite surprising as I thought they would be much more lax.

  8. Even StevenMEMBER

    The survey sounds highly inaccurate to me. As Matchbox points out, banks are required to test a borrower’s capacity to repay (with reasonably living expenses) on an assumption of rates being several percent higher. They must have been surveying a very selective group of people if more than 50% can’t afford a 1% increase.

      • Yeah sure.but did they increase all other cost increases in an inflationary environment or just test for a mortgage repayment increase in a vacuum. Because that’s how the real world works.. one set of rates go up when all other costs stay constant.
        You might find APRA has been asleep at the wheel.

        • Oh no doubt they are asleep at the wheel. Just not sure people can’t find $300. I mean if they cut other expenses. But then again. No idea how people are paying $800k mortgages..

        • The assumption is that other expenses will be cut. The banks know that in ‘ordinary’ rate stress environments, most households will cut into anything in order to meet the mortgage repayment, given the consequences in Aus of not doing so.

          • Yes, but even on this, they are assuming this works in a vacuum. So we’re saying ALL mortgage holders in Aus collectively reduce spending in the economy to pay down the mortgage, and that somehow won’t feed straight back into their ability to pay because reduced consumer spending will somehow NOT impact the GDP and therefore, the mortgage holder’s employment prospects?
            When you assume a scenario of IR rising, you need to also factor in what would cause that environment, and what other dominoes will fall in tandem. Right? Or is that too realistic in this funny money world…

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