Digital Finance Analytics (DFA) has released the December 2018 mortgage stress and default analysis update.
The latest RBA data on household debt to income to September fell a little to 188.6[1], but still remains highly elevated. The housing debt ratio continues to climb to a new record of 139.6, according to the RBA. This shows that household debt to income is still increasing.
This high debt level helps to
explain the fact that mortgage stress continues to rise. Across Australia, more
than 1,023,906 households are estimated to be now in mortgage stress (last
month 1,015,600), another new record. This equates to 31% of owner occupied
borrowing households. In addition, more than 22,000 of these are in severe
stress. We estimate that more than 62,000 households risk 30-day default in the
next 12 months. We continue to see the impact of flat wages growth, rising
living costs and higher real mortgage rates. Bank losses are likely to rise a little ahead.
Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to the end of December 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.
Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. They may or may not have access to other available assets, and some have paid ahead, but households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home. Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.
The accumulation of larger mortgages compared to income whilst costs are rising and incomes static explains the issues we are now seeing. Continued rises in living costs – notably child care, school fees and fuel – whilst real incomes continue to fall; and underemployment are causing significant pain. Many are dipping into savings to support their finances. The latest ABS GDP numbers confirmed the falling savings ratio.
Indeed, the fact that significant numbers of households have had their potential borrowing power crimped by lending standards belatedly being tightened, and are therefore mortgage prisoners, is significant. More than 49% of those seeking to refinance are now having difficulty. This is strongly aligned to those who are registering as stressed. These are households urgently trying to reduce their monthly outgoings”.
The next question to consider is which households are being impacted. In fact, negative equity is touching “lots of different segments” of the market for different reasons, but collectively it is an “early warning sign” for what is to come.
Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes. Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households, contrary to the popular belief that affluent households are well protected. This is shown in the segment analysis below:
Stress by the numbers.
Regional analysis shows that NSW has 278,959 households in stress (281,275 last month), VIC 285,723 (283,395 last month), QLD 180,794 (181,156 last month) and WA has 135,548 (132,135 last month). The probability of default over the next 12 months rose, with around 11,650 in WA, around 11,600 in QLD, 15,600 in VIC and 16,600 in NSW.
The largest financial losses
relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied
borrowers) and VIC ($1.48 billion) from Owner Occupied Borrowers, though losses
are likely to be highest in WA at 3.6 basis points, which equates to $1,022
million from Owner Occupied borrowers.
A fuller regional breakdown is set out below.
[1] RBA E2 Household Finances – Selected Ratios September 2018
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