Aussie mortgage holders burn in negative equity hell

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:

Australian discount variable mortgage rate

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:

Australian mortgage repayments

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.

Unconventional Economist
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  1. C.M.BurnsMEMBER

    “”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 ?

  2. pfh007.comMEMBER

    “..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.

  3. Mike Herman TroutMEMBER

    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….

  4. UpperWestsideMEMBER

    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)

  5. 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)
    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.

    • C.M.BurnsMEMBER

      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.

  6. 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

      • 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

        • The Travelling PhantomMEMBER

          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

      • happy valleyMEMBER

        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.

    • One trick ponyMEMBER

      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.

    • happy valleyMEMBER

      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.

  7. 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”.

  8. Display NameMEMBER

    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.

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