Affluent suburbs feel heat from rising property costs

The Australian Financial Review featured the Digital Finance Analytics probability of default modelling today. We discussed our analysis on the blog recently.

Property buyers in some of the nation’s swankiest suburbs are among those under most stress keeping up mortgage repayments, according to an analysis by postcode of income and debt levels.

The young affluent in plush inner suburbs living the high life are more likely to be financially derailed by rising costs than battlers in new estates on the suburban outer fringes, the analysis reveals.

Households in Melbourne’s gilt-edged Toorak, about 8 kilometres south-east of the central business district, where median house prices are $3.5m and $845,000 for apartments, are five times more likely to default on mortgage payments than the national average.

It’s the same probability in Bondi, about 8 kilometres south-west of the central business district, where median prices are about $2.5m for a house and $1m for an apartment.


Other suburbs on Sydney’s North Shore, such as Gordon and Hornsby, are also among the addresses where hundreds of households are on the financial edge of a 30-day default, which is a late mortgage payment.

“Everyone focuses on Western Australia and Queensland but there is a much broader group of households that are closer to the edge and will find it difficult to cope if interest rates go up,” according to Martin North, principal of Digital Finance Analytics, a research company that used 26,000 household surveys to make the predictions.

A late payment demonstrates financial stress and is a long way from an absolute default, or forced sale.

His analysis identifies the amount of headroom households have by stress testing their income against the size of mortgage, whether they have paid ahead and other financial commitments, such as rising fuel, electricity and child minding.

More than 16,000 mainland households are among the nation’s top 20 twenty most vulnerable postcodes and thousands more are at risk of falling behind in payments of interest or principal on their home loan, it finds.

Probability of the top 20 households’ defaulting on mortgage repayments over the next 12 months range from about 3 per cent to 5 per cent, according to the analysis.  A probability rating of more than 2 per cent is “significant”, Mr North said.

Standard & Poor’s Australia, the ratings agency, said most borrowers will stay on top of their mortgage repayments while unemployment levels are relatively stable and interest rates low. Its analysis is based on historical data.

Fixed and variable rates for investors and owner occupiers are rapidly increasing from record lows as the cost of capital funding on international markets has soared in the past two months.

More than 200 mortgage products have increased in the past two months by up to 65 basis points as borrowers recalibrate their loan books in response to a 30 per cent increase in the US 10-year treasury benchmark.

These rises are out-of-cycle to the Reserve Bank of Australia’s (RBA) cash rate movements.

Bankers, such as David Carter, chief executive of Suncorp banking and wealth, are warning rising funding costs is a “trend that is unlikely to change”.

“Generally we expect rates to rise, driven mainly by an expected rise in mortgage rates, as employment and wages growth remain within their current bounds,” said Mr North.

AMP, the nation’s largest financial conglomerate, is the latest to increase rates.

Last Friday (6 Jan) it increased variable interest rates for residential investment loans by 15 basis points for new customers. The same new rate for existing residential investment loans applies from today. (9 Jan)

Most exposed are the young affluent that have taken out large mortgages to pay top prices in an over-heated housing market for houses and apartments, often about inner suburbs where excessive supply is impacting prices.

“Although affluent, many at risk households are grossly over-committed, with little free cash,” Mr North said about young, professional poor-rich in posh inner suburban suburbs of Melbourne and Sydney who are highly leveraged, making minimum repayments and have static income.

“They would be disproportionately impacted by even a small rise,” he said.

Latest RBA analysis shows a sharp rise in debt of about 6.5 per cent over the past year, much higher than income growth.

Latest all-cities average dwelling price from research company CoreLogic, estimates a national increase of nearly 11 per cent in the past 12 months, overwhelmingly concentrated in Sydney, which posted growth of more than 15 per cent, and Melbourne, about 14 per cent.

Western Australia, where house and apartment prices fell by 6 per cent during the past 12 months, dominate the top 20 list of stressed suburbs with nine postcodes, followed by Queensland with six.

Perth real estate agents are forced to provide live entertainment and free coffee to attract bidders to suburban auctions where prices plunged as the mining boom ended.

The DFA analysis shows around 20 per cent of nation’s households would have difficult with a rise of less than 0.5 per cent, another 4 per cent would be troubled by a rise of between 0.5 per cent and 1 per cent and only 35 per cent could cope with a 7 per cent rise.

“The property market will generally still be gaining ground this year, though some regions will be under significant pressure,” Mr North said. “Banks will be seeing losses rising a little, but defaults will remain contained.”

You can listen to my ABC Radio interview for Radio National’s The World Today programme on the same subject.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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