Mortgage bomb primed to blow up Australian cities

On Tuesday, the Australian Prudential Regulatory Authority (APRA) released data on high debt-to-income (DTI) new mortgage lending.

According to APRA, the percentage of new mortgages taken out at a debt-to-income ratio above 6 times hit a record high 24.4%, up from less than 15% in early 2019:

High debt-to-income mortgage lending

Highly leveraged mortgage lending is booming across Australia.

Since March 2019, $264 billion worth of mortgages have been originated across Australia with a DTI of 6 or above, suggesting there is a large pool of borrowers that are extremely sensitive to mortgage rate increases.

Separate data from property advisory group RPM also shows that many families living on Melbourne’s urban fringe are experiencing acute mortgage stress, with median mortgage payments exceeding 40% of household incomes in three suburbs in the city’s south-east: Berwick, Botanic Ridge and Officer.

A further 33 growth suburbs across Greater Melbourne have median home loan payments above 30% of family income, according to RPM:

Mortgage repayments as a percentage of household income

Outer suburban suburbs are experiencing mortgage stress.

Presumably, similar results are being replicated across Western Sydney’s growth areas.

To add further insult to injury, these areas are likely to be car-dependent and more sensitive to the spike in petrol prices, which acts as a drain on household disposable income.

Given the median economist is tipping 1.25% of interest rate rises starting from June, whereas the market is tipping 2.15% of rate rises, it would appear that Australia’s outer suburbs mortgage belt is primed to blow.

The situation is most worrying for the circa 500,000 fixed-rate mortgages scheduled to expire by mid-2023, many of which were originated at rates below 2.5%. These mortgage holders are facing a potential doubling of mortgage rates once their loan term expires, which is likely to plunge many into severe mortgage stress.

Unconventional Economist

Comments

  1. Hugh PavletichMEMBER

    Why did the Central Bank of Ireland cap lending to 3.5 times gross annual household incomes ? …

    Mortgage Measures | Central Bank of Ireland

    https://www.centralbank.ie/financial-system/financial-stability/macro-prudential-policy/mortgage-measures

    … following the ’07 crash, when housing Median Multiples across its metros fell from 4.7 Median Multiple to 2.8 …

    Demographia International Housing Affordability: All Editions

    http://www.demographia.com/db-dhi-index.htm

    … putting all its Banks to the wall and requiring about 70 billion euro of bailouts from German financial institutions (that stood to lose the most).

    At a national level it is likely Australian housing is about 7.0 Median Multiple overall … New Zealand about 9.0…

    Median Multiples | interest.co.nz

    https://www.interest.co.nz/property/house-price-income-multiples#:~:text=Based%20on%20this%20official%20work,on%20the%20US%20housing%20market.

    Following major adjustments to pricing across both countries going forward and reckless high multiple lending requiring solutions, is it likely Debt to Income ratios will be capped to 3.5 times (like Ireland), with the Banks required to ‘wear’ the losses because of reckless high multiple lending ?

    How will the Banks respond in the Courts when asked what they learnt from Ireland and what steps they took to protect themselves, their shareholders and their customers by lending responsibly ?

    • pfh007.comMEMBER

      Banks “wear” the losses?

      This is Australia and we never allow banks to wear losses.

    • bubbah buddhaMEMBER

      What most Australians dont realise is that banks , even the big ones, can and (some) will fail on the back of this massive property ponzi.
      Next up, property developer and construction conglomerate dominoes…all they way down to the unpaid subbies and suppliers…followed by royal comission and findings of ‘systemic failure’ while those responsible (politicians, bankers, property developers) retire comfortably.

      • The Government cannot let any one of the big 4 go under because they all use each other’s debt as collateral. If one goes they all go. So that simply ain’t happening. They wouldn’t even let St George or Macquarie go in the GFC because the impact would have been too great.

        All of these high LVR mortgages have mortgage insurance, so the canary in the coalmine will be Genworth. And there will be so many people that signed up for mortgage insurance to max out the borrowing that don’t realise once Genworth has paid the banks the gap (while it still can) it can then come after them to recoup its losses. See how many blank, pale faces you get when you point out that the mortgage insurance protects the banks, not the borrower.

        • bubbah buddhaMEMBER

          +1 on morgage insurance. Your point on them all borrowing to eachother is on the ‘money’ and exactly the problem. Its burn the bond holders or the tax payer…guess who pays? If excretia does hit the ventalation device there may be some quasi-nationalisation like they had in that link I posted regarding the documentry on the Irish National Asset Management Agency, which essentially nationalised all the big banks and ringfenced the bad debt

  2. All a bit bcnich ain’t it. The rate rises predicted here look ridiculous until you see the aggressive nature of the fed dot plot released overnight. Then it looks dovish.

  3. Holiday In ScomodiaMEMBER

    How to learn to stop worrying and love the bomb… Moratoriums. Deferrment. Reduced payments then recapitalisation of arrears with loan term extension. Dip into super. Lodge AFCA disputes to delay repossession for months- maybe years if enough ppl all do iing it. Tap the boomer parents super. Move back in with the folks, rent out your place in the hot rental market and only pay the mortgage shortfall. Multigen- move the grandparents in to save on afterschool care and tap some of their pension to help with mortgage. Multifam- move in your mates and their kids on bunkbeds Become a slumlord. Sell some stuff. Quit the booze and Uber Eats… And this is all before the rich house buyer visa immigration tap is blown open, or ‘homekeeper’ payment, ER super, or other creative schemes from the gov… lace up the can kicking boots and have a go… after all…

  4. pfh007.comMEMBER

    APRA is responsible for banks failing NOT households.

    If a household fails to pay their mortgage they should be tossed out on the street to make them understand the importance of personal responsibility.

    If the value of the banks security….the house…..falls we have folks like the RBA and government to step in and provide support to the price of the asset and if necessary the bank who has suffered from the households lack of personal responsibility.

    A Liberal National Party government may not hold a hose but it certainly holds the dainty hands of our bankers.

    • “If a household fails to pay their mortgage they should be tossed out on the street to make them understand the importance of personal responsibility.”

      Anyone who has worried about personal responsibility and thought that it might be a required feature of life has lost big time. We now have an entire generation of people who understand that this is a ponzi and that you need to play it as hard as possible. Thinking that the old world rules apply is complete folly.

      MAX DEBT. MAX DEBT. MAX DEBT. The ponzi will make you rich.

      • Those who have leveraged into the growing market have done incredibly well. Those who are older and bought their primary residence without massive leverage have also done very well

        The difference between the 2 is the risk profile. Big sums of money, highly leveraged are very sensitive to interest rate fluctuations. People may say “negative gear the losses” but that only works if you have the disposable income to fill the gap.

        Not convinced the govt will bail out those with multiple properties, more confident any package offered directly or through the banks will be for PPOR only.

    • “If a household fails to pay their mortgage they should be tossed out on the street ”

      That would have been a good idea 10 years or so ago. I know too many people who have lived beyond their means by using their equity as an ATM. It would only work if applies to recent mortgage holders. Otherwise we would end up with a retirement catastrophe.

      Maybe something for Leith to bear in mind with his push for reverse mortgages for retirees. It works well right up until the point interest rates rise and retirees cop a double whammy of rapid debt increases and falling equity.

    • Bankers are meant to be finance experts, not your average Joes. As that Roger Brown fellow on Twitter keeps saying, the RBA have mislead mortgagors on where interest rates will be. They have created the problem.

  5. I for one have no problem with the coming carnage and I am sure most on here agree. My 30yo nephew and his partner went bought a 2 million dollar home yesterday. He knows they will never pay it off but such was the boomer parental “guidance ” that they did it anyway. Maybe in 20 years at inheritance time?

    • I have relatives who for many years lived large off of rent from investment properties with interest only loans. When the downturn came in 2018, they got wiped out. Caused a separation and at least one of them is now renting.

  6. I’m in one of those growth corridors, I’m at 3.5x single income. It is what it is. Everyone around me is going to go up in smoke.

  7. truthisfashionable

    >Presumably, similar results are being replicated across Western Sydney’s growth areas.

    Two points:
    1. Land in far South Western Sydney is tipping into $1300per sqm for anything smaller than 500sqm. In the Flooding wastelands in the North Western corner (Box Hill, Schofields, Riverstone) you are now looking at $2500 per sqm, with block sizes under 350sqm.

    2. Hitting the display homes and talking to the sales agents (I am trying to be a good Sydney-sider), multiple different agents (different builders) had mentioned that the land price is now forcing people to build smaller houses or take the base build because the land eats up more and more of the ‘available budget’.

    I would suggest that this is starting to indicate that ‘throwing money at the construction industry’ is starting to become a problem and those so called ‘multipliers’ are nearly exhausted.

    • Charles MartinMEMBER

      A mate sent me a land release price list for a place called Akuna Vista which is near Marsden Park in Sydney.
      for a 225 sqm block they want $675k. Nuts.
      But apparently they are selling well. The biggest block is 497 sqm which costs a cool $1,150,000.

        • Not seeing that at the minute, the heavily indebted are living the best lifestyles. It’s like they’ve given up on ever paying the debt back, so it’s a case of just keep playing the game, refinancing regularly to strip out gains and living high. Fatalistic just like the late 80s.

          The conservative, debt free and cautious types are the ones copping it at this part of the cycle..

          • Downside is you can never stop generating an income through work or other investments. Cannot re-mortgage without cash flow, if you ever want to stop working or have a choice on not working then the debt needs to disappear over time.

  8. Inner city blue chips will fall harder, they always do. Way more people swimming naked in there.

    Biggest data report in circulation recently is the equity extraction Australia vs USA over the last 12 months.
    Australia $93B, USA $67B (similar post currency conversion)……..USA market is 13x the size of Australia. How good are trinkets and equity mate?

  9. The horse blinker bear porn is all very one dimensional. Most of the people/families who will be caught up in this simply want to own a roof over their heads, somewhere < 2 hour commute to work with access to a school and shops. What exactly was their alternative choice? Go tot he regions….. opps…. nope, stay in a rental market with little certainty, now record low vacancy and sky rocketing prices? In many cases their rents were less than mortgage payments and might still be even with some rate rises.

    It's amazing how many people seem to think they will escape the carnage they so desire let alone those who claim to be somehow more 'virtuous' by not participating (or simply criticising) the broken system, only to relish in the financial opportunities of the predicted bloodbath….

    • For me, the bigger issue will be the “implied” wealth people who outright own their home believe they have. Forget the 2T in debt slaves, they know they are stuffed if it goes south. We should be more worried about the 7T in housing value which is owned outright and what a collapse in those assets will do to the owners and nations psych. Inheritances destroyed, ability to draw on equity…gone.

      Lets just say the Wagyu Cattle will be pleased with the reprieve.

      • Indeed, there is far more at stake than ‘punishing’ a bunch of specufestors. If this goes wrong in a significant, uncontrolled way, it will have serious, far reaching consequences, including for those believe they were sensible relative to others….

        How many of these commenters were arguing for complete rent moratoriums and the abolition of evictions 2 years ago….? Champions of ‘pure capitalism’ one day and cheerleaders for socialist order the next.

    • Yes, they were found to be above board on all items with no remediation needed according to the Govt.

  10. bubbah buddhaMEMBER

    Relax, you can rely on Australian Exceptionalism…we’re a special case here, exact same mistakes globally wont be amplified here, she’ll be rooooiiight! 🤠