Veteran bank analyst Jon Mott warns a $250 billion wave of mortgage delinquencies could sweep Australia if ANZ’s, Westpac’s and the financial market’s 3% official cash rate (OCR) forecasts come true.
Mott notes that the build-up in mortgage debt over the prior two years “is the second-biggest jump seen since lending data was first captured during the 1970s, and only beaten by the 131.5% rise in the lead-up to the 1988-89 housing downturn”.
And it is this cohort of borrowers that have overextended themselves and risk defaulting on their mortgages:
While he concedes the analysis is rough, he estimates that, in total, borrowers who have somewhere between $200 billion and $250 billion in mortgages will face severe stress if the cash rate hits 3 per cent later this year, as expected.
“If interest rates continue to rise sharply, and stay around these levels, there will be a ‘fat tail’ of borrowers who will simply not be able to afford to meet their repayments,” Mott says.
“For the first time in several decades, we are likely to see a wave of fully employed borrowers falling into delinquency as they simply can’t make ends meet.”
Mott’s analysis might seem alarmist. However, the latest ANZ, Westpac and futures market forecasts tip the OCR will peak at around 3.25% early next year, which would take the average discount variable mortgage rate to 6.60%, up from 3.45% in April before the RBA commenced its tightening cycle:
Mortgage rates to rise to 2012 levels.
This would represent the highest mortgage rate since 2012. It would also lift principal and interest mortgage repayments by 43% against their level in April:
In dollar terms, a household with a $500,000 mortgage would see their monthly repayments rise by $962, whereas a household with a $1 million mortgage would see their monthly repayments soar by $1,924.
This presents a poison pill for households that borrowed to the max over the pandemic at ultra low rates to get into the market. These borrowers would face extreme financial strain at the same time as their house values collapse, especially across Sydney and Melbourne.
Many would be thrown into negative equity and some would default.
Ultimately, the ball is in the RBA’s court. Will it continue hiking aggressively, as tipped by ANZ, Westpac and the financial markets? Or will it follows CBA’s projection, stop-out early and then cut?
Only time will tell.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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“”This presents a poison pill for households that borrowed to the max over the pandemic at ultra low rates to get into the market. These borrowers would face extreme financial strain at the same time as their house values collapse, especially across Sydney and Melbourne.””
FFS, no one forced a single person to borrow to the max during a once in a century global pandemic.
MB, quite rightly, rails against instances of “privatize the gains, socialise the losses” when it occurrs in the corporate world. Why are you suddenly for this mentality when it is private citizens ?
Exactly. Sorry couldn’t have said that better.
Whilst noone gives a rats about peoples rents going up!
Rents have gone silly here in NYC and I am told its also true in London
Hope all is well in Berlin
Are you ein Berliner?
First we take Manhattan, then we take Berlin? Ja?
The rent cap (Mietendeckel) in Berlin was found to be unconstitutional and abolished in 2021 – the only remaining measure between renters and landlords is now the ‘rent brake’ (Mietpreisbremse) which limits increases to 10% above local comparable properties.
At least they still have that. Seems like all of the rules that made certain civilisations successful are being decimated by the rich.
And what about the over priced, rundown, amenity depleted, dross offered as ‘housing’ to desperate people to rent:
Never has word suffered greater misuse & abuse…
“..Mott’s analysis might seem alarmist. ..”
Nah. I have never known a bank analyst, veteran or otherwise, to bang a gong for the interests of the debt peddling complex.
That sector would never stoop so low as to use fear mongering as a method of blackmailing the government into giving them more privileges or protecting the ones they already enjoy.
But his klaxon siren is welcome as it will allow time for all the greedy and unwise to sell their assets and repay their stonking great debt contracts while they still can.
Good.
So, it turns out in every Ponzi scheme those who got in last, get burned.
Funny that…
We’ve made a mistake, but let’s make another mistake by not doing anything about it. Nah. Raise the rates. Reversion to the mean. wasn’t there a poster here called reversion2mean…. he knew what it was about clearly….
He is no longer on the reservation.
What about the reversion?
“Don’t buy Now” also missed his hour of glory
Negative Equity hurts. I first bought in 1989 on a BBSW+margin based loan
I drew down my credit card cash advance to fund the deposit.
It is scary to realize that if you sold up you would be bankrupt, so you squeeze every penny
inflation plus being young single and no kids ( and willing to work 12 hours a day) got it sorted eventually
Not sure today’s over extended borrowers will find it so easy.
UW
No one believes me we will see 15 to 20% again 3 to 5 years out
You’ve seen it me too
No one believed me start of last year at 1.99% we’d be at 5% and I didn’t know 5 year fixed is 6.84% at CBA
I think there is 2 or 3 50bp hikes
Sept Oct & if CPI is high in Oct another in Nov
RBA will be raising in a serious downturn
They have a history of being late
BCNICH do you seriously believe that FED can do 2/3 more hikes and bring down inflation from 9% to 3%?I am not seeing any cooling of inflation here in OZ.A savoy cabbage used to cost $5 and now it costs $9.The hikes will not bring prices down. The only way it will come down is if rates rose for another year and the world economy crashes leading to massive lay-offs.
For ag, perhaps normalisation of supply? Assuming we don’t get catastrophic la nina floods again (not looking good. Talk of epic northern rivers floods come sept)
Isn’t the option being presented to the RBA to either inflict higher mortgage rates onto mortgage holders (30% odd?) of the population with a disproportionate impact on the most recent home buyers (that should have a/ gone in with their eyes open to the high possibility that they were buying at all time high prices and all time low rates. b/ been checked by the banks they could still afford the mortgage if rates rose 3%. c/ have the option to cut back on wagyu steak, Shiraz and avocado on toast to make ends meet. d/ sell the Raptor and the JetSki)
OR
Risk higher inflation on all imported goods (nearly everything we buy) on 100% of the population due to the AUD going down the S bend and disproportionately impacting the the people surviving on the lowest incomes?
Easy answer if you ask me. Whatever the Fed does, we will follow out of necessity; it is the cleanest dirty shirt in the washing basket option.
yep, pretty much. Harley Bassman (on the second most recent podcast) decscribed the same decision that the Fed is facing as well.
Really hurt a small % of the population (X % have a mortgage, only a fraction of those took out a mortgage in the last 2 years); or
Inflict significant inflationary pain on the entire population, including pensioners, lower income people (who don’t have a mortgage) etc.
second most recent Macrovoices Podcast
No, the bloggers on here know that house prices must be kept up or else! It’s the Aussie way.
This is going to get nasty
Money is now going to head into the sharemarkets
We will have a correction again but we will test highs ASX 7600 & I still believe we will touch ASX 10,000 over the next 12 months
Money is running from property to equities
Probably also running out of fixed income too, many have been crucified in bonds
Bonds will be good later this year & most will exit fixed income
How do they get crucified in the bond market?
TP
haven’t you seen what’s happened to investors in the bond market
As rates rise bonds fall
It’s the worst year for bonds in years
When int rates go to 10% and they will get there is 3/4 years bond holders will get hammered
Fixed income has been safe
Fixed income will be so bad next 5 years
Financial advisors most have no idea will tell clients it’s safe
They’ll lose most of their money
Since Jan the Aust 10 year went from 1% to 4%
Have a look at VGB etf
Thank you Bcnich for the explanation..I’m still trying to learn my way to understand some of the bond market and its relationships with the FED
As a rule of thumb, every 1 percentage point increase in bond interest rates means a 10% fall in bond prices?
Hence, the reason for professional bond traders being as filthy as housing punter suckers in taking Phil Lowe at his word that the cash rate would not increase to 2024 and that he was determined to keep at yield curve control at 0.25% pa, only then to drop the control overnight.
I think a scenario of domestic property getting torched and equities rallying (at the same time) is very unlikely. Especially if you are talking about Aust equities (which you are with your index targets above). Energy/Resources MAY buck the trend in that scenario (I know you are a commodity bull – I’m sceptical) – even if you are right on commodities that’s a lot of heavy lifting for one sector to overcome the pressure on most other sectors from a property crash/squeezed households/crushed confidence/possible recession etc. Think of how the banks alone will perform (huge part of the index). Unless you are basing your bullish equities call on the anticipation of a dovish pivot from the RBA, but that ultimately puts a floor under the property correction as well, not just equities.
how will bonds be good if you expect 17% interest rates and ASX 10,000
Good point Mr Coming
Sounds like some buying opportunities ahead.
End of next year
You’ll be buying some places 70% off
18 months™️ you say?
😉 So many opportunities in the pipeline!
I’ll happily purchase your home for 70% off at the end of 2023 to ensure you’re correct;)
Hell, you’d do it at 50% off.
You’re such a giving person.
So what happened to the promises that banks were lending responsibly & had tested their new loans with much higher interest rates?
Banks lending responsibly – that has to be the greatest contradictions in terms? And to think, Josh thought it necessary to try and change things so that lending irresponsibly would be formally sanctioned.
No mention of the poor investors who reinvested equity from their capital gains to ensure their leverage was maximised.
First to get burnt hopefully,!
Particularly the dumb Mexicans who bought property in sth east Qld over the internets. It is 100% crap when are looking at a property, see it gets sold for 100k above your max, only then to be put up for rent. Burn burn burn
Some ppl thought they were really well off and smart who did this, and are going to get burnt so hard. Imagine the ego bashing about to happen.
Savvy…
Unlock that frozen equity!
Hahahaha!
Or bought at the top and passed the interest rate repayments to their tenants.
Anyone see that thing with the Indian builders and all the uncompleted homes? Of course all the owners were Indians too, I got a hefty chortle out of one of them saying “he couldn’t believe this happened in Australia”.
The director being AWOL on a “family holiday” is the real story here.
He won’t be back.
Yep, clearly.
Jim will need to get on the front foot like Free Market Josh did and warn the banks that they need to keep lending. They need to keep that credit turning over until more consumption units can start flooding the economic zone.
Time to fess up Leith. You’ve got a big mortgage, haven’t you?