Category: Household Survey

Mortgage Stress Accelerates Ahead Of The Election

Digital Finance Analytics (DFA) has released the April 2019 mortgage stress and default analysis update.  Once again, it’s the continuing story of pressure on households as ongoing wages growth is not offsetting costs of living, and mortgage repayments and total debt continues to rise. Recent bank reporting highlights the elevated risks in the household sector as this all plays out.

The latest RBA data on household debt to income to December rose to 189.6[1], and remains highly elevated. Plus, the housing debt ratio continues to climb to a new record of 140.2, according to the RBA.  This shows that household debt to income is still increasing.

This is confirmed by the latest financial aggregates to end March recently released by the RBA, with owner occupied lending still growing significantly faster than inflation at 5.7%.

This high debt level, in the context of broader financial pressure, helps to explain the fact that mortgage stress continues to rise.

Across Australia, more than 1,050,450 households are estimated to be now in mortgage stress (last month 1,044,666), another new record. This equates to more than 31.7% of owner-occupied borrowing households. In addition, more than 30,413 (27,775 last month) of these are in severe stress. We estimate that more than 70,149 (last month 66,700) households’ risk 30-day default in the next 12 month. This is as the impact of flat wages growth, rising living costs and higher real mortgage rates hit home.  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 April 2019. 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.

Despite reassurances that household finances are fine, the pressures are rising, thanks to an accumulation of larger mortgages compared to income whilst costs are rising, and incomes remain static.  Housing credit growth is still running significantly faster than incomes and inflation and continued rises in living costs – notably child care, healthcare costs, school fees and electricity prices are causing significant pain. Many households are depleting their savings to support their finances or are trying to refinance.  

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 284,014 households in stress (286,890 last month), VIC 292,114 (283,753 last month), QLD 184,037 (185,282 last month) and WA has 140,836 (141,199 last month). The probability of default over the next 12 months rose, with around 13,135 (12,600 last month) in WA, around 12,936 (12,400 last month) in QLD, 17,611 (16,700 last week) in VIC and 18,703 (17,700 last month) in NSW.  

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.46 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 3.1 basis points, which equates to $1,046 million from Owner Occupied borrowers. 

Here is a regional breakdown.

Here are the top postcodes sorted by number of households in mortgage stress.

Handling Mortgage Stress

Households who are in financial difficulty should not ignore the signs. Though many do. And trying to refinance to solve the problem often ends up just postponing the inevitable. 

We think there are some simple steps households can take:

Step one is to draw up a budget, so you can see where the money is coming and going. From our research, only half of households have any budget. This means you can then make decisions about what is most important, and what can be foregone. Select and prioritise.

Step two is to talk with your lender, as they have a legal obligation to assist is case of hardship. Yet many households avoid having that conversation, hoping the problem will cure itself. I have to say, in the current low-income growth, high cost environment, that is unlikely.  And remember rates are likely to rise at some point.

Step three. Work out what would happen if mortgage rates rose by say half or one percent. Pass that across your budget and examine the impact. Then you will really know where you stand. Then plan accordingly.

[1] RBA E2 Household Finances – Selected Ratios December 2018

You can request our media release. Note this will NOT automatically send you our research updates, for that register here.

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Note that the detailed results from our surveys and analysis are made available to our paying clients.

The US Stock Market And Wealth Inequality

Moody’s says that inequality has been increasing in the U.S. for decades. This has been well-documented. However, new data from the Federal Reserve shed additional light on the distribution of wealth and how it has evolved over time. The Distributional Financial Accounts show levels and share of wealth across four segments of the wealth distribution: the top 1%, the next 9%, the rest of the top half, and the bottom half. This is done by sharing out household wealth as shown in the Financial Accounts using primarily the Survey of Consumer Finances, supplemented with other information in some instances.

The data clearly show the skewed distribution of wealth. The most recent data, for the fourth quarter of last year, show that the wealthiest 1% of households held 30.9% of total household wealth, only marginally below the record high of 31.7% a year earlier and well above the 1990 low of 22.5%. By contrast, the bottom half of the wealth distribution holds only 1.2% of all wealth, down from over 4% at points during the 1990s. However, it is better than the period immediately after the Great Recession, when this group was in debt in aggregate.

One clear feature of the data is that the distribution of wealth doesn’t change in a linear fashion. The share of wealth held by the richest 1% has declined at times, and in some cases sharply. For example, the share topped 28% at the start of 2000 before falling under 25% in late 2002. Similarly, the share fell from 29.4% in late 2007 to 26.5% in early 2009. Both declines corresponded with sharp declines in U.S. stock prices.

Ownership of stocks is heavily skewed toward the high end of the income and wealth distribution. Hence, the stock market is a strong driver of the share of wealth held by the richest households. The extent of the correlation may be surprising.

More interesting, the correlation largely breaks down for the next richest 9% of the population. Their share of wealth fell in the early 1990s, then rose steadily until the Great Recession before trending lower. While there is some correlation with movements in stock prices, they are clearly not the dominant driver they are for the richest households. This emphasizes how skewed wealth related to equity prices is.

To drive home the point, the correlation between the share of total wealth held by the richest 1% of households and the share of corporate equities and mutual fund shares held by the richest households is an astounding 94%. At present, equities and fund shares account for nearly 40% of wealth for this group of households. However, this share has grown dramatically over time. In the early 1990s it was under 20%, and over the entire history of the series it averages 30%.

This one component of wealth is the major driver of changes in share for the wealthiest households. Their share of wealth excluding stocks and mutual fund shares is about 4 percentage points lower on average, rises less, and is much more stable. This may understate the impact of equity prices on the wealth of these households, since equities are included in life insurance reserves and pension entitlements and correlate with equity in noncorporate businesses.

Other obvious candidates as drivers of changes in the wealth distribution fail to achieve anything like the apparent impact of equity markets. Despite making up a larger portion of household assets than corporate equities and mutual funds, housing wealth is less of a driver of wealth shares. Houses are more commonly owned, and, other than around the Great Recession, movements in house price growth tend to be gradual. Even for the lower-wealth households, where real estate would be their primary asset, there seems little linkage between house price growth and those households’ share of total wealth. Similarly, the link between unemployment and wealth shares is weak.

The differences in the makeup of household balance sheets at different positions in the wealth distribution are also shown in the distributional accounts data. This is one of the driving factors in the share movements. Therefore, it should not be surprising that corporate equities and mutual funds are most important for the richest households. They account for over a third of assets for the wealthiest 1% of households, compared with about a fifth for the next 9% of households, under 10% for the next 40% of households, and under 4% of assets for the bottom half of the wealth distribution. Equity in noncorporate business is similarly skewed heavily toward wealthy households.

By contrast, real estate assets are the most important piece of the balance sheet for the bottom half of the wealth distribution. For this group, they account for about half of all assets. The share declines sharply as wealth increases until it falls below 12% of assets for the richest 1% of households.

Pension entitlements are an important component of the balance sheet for households in the upper half of the wealth distribution, excluding the very rich. They make up almost a third of assets for households in the 50th-90th percentiles of the distribution and about 30% for households in the top 10% excluding the top 1%. However, they make up less than 10% of assets for the very wealthy and bottom half of the distribution. Most likely, lower-wealth households don’t have pensions while pensions for the very wealthy are swamped by other assets. Pension entitlements are important for future spending but may be less important for current spending if they are not well-understood.

Liabilities follow what is probably an expected pattern. Mortgages account for a little over two-thirds of total household liabilities. However, they account for only a bit more than half of debt for households in the bottom half of the distribution. Consumer credit accounts for about 40% of their debt, the highest for any of the segments and well above the average of about a quarter.

The mortgage share increases until the top 1% of the distribution. They have nearly 15% of their debt in the other loans and advances category, dramatically more than other segments. This category captures debt related to their businesses and investments. Hence, just as real estate is a smaller portion of assets for the richest households, so too is mortgage debt a smaller share of liabilities.

The stock market has shown itself to be an important driver of the distributions of wealth. Current prospects are for the market to perform poorly by historical standards over the next year or so.

Economic growth is expected to slow and valuations remain high. Neither is favorable for the market.

The one silver lining in this is that weak stock market performance tends to associate with a moderation in wealth inequality.

High Resolution Negative Equity Maps

Following 7/30’s report last night I have received a number of requests for access to the maps. So here are the high resolution versions for Sydney, Melbourne and Perth. If they are reproduced elsewhere, please attribute DFA.

As discussed in my video, this is based on the number of households in each post code recording at least one property in negative equity – where the current mortgage (net of any offset accounts) in greater than the estimated current forced sale value plus sale costs. The analysis is based on results from our 52,000 household surveys nationwide.

DFA Latest Scenarios And Q&A Replay April 2019

This is the high quality edited version of our recent live stream event.

Here are our latest scenario results, which we discuss in the show.

This is the original unedited version with pre-show and live chat.

This is the link to Harry Dent’s schedule.

A Quick Reminder – Live Event 16 April 20:00 Sydney

A quick reminder we are running our live event tomorrow, where we update our property and finance scenarios and answer questions from the audience in real time. You can send questions beforehand, via the DFA blog, or in the live chat on during the session.

Here is a direct link to the event (where you can set a reminder).

Household Financial Confidence Dives Again

DFA has released the March 2019 Household Financial Confidence Index, which is based on our rolling 52,000 household surveys.

The index reached a new low this past month as the weight of issues on many household’s shoulders pile up. The index fell to 86.1, well below the 100 neutral setting.

This video discusses our findings.

But in essence, all household segments, using our wealth lens, now sit below neutral, with those households with mortgages continuing to track lower, together with those who own property but are mortgage free. In fact the only segment showing a rise is the renting cohort, who see their rents in some centres (especially Sydney) on the decline. We find more among the Free Affluent segment, which is more aligned to the incumbent government, questioning their economic management.

Across the age bands, younger households are more negative, and this highlights some of the inter-generational tensions which we suspect will be played up in the yet to be announced election campaign. In fact, households in the 50-60 year band are most confident (thanks to lower mortgages, bigger savings and controlled costs).

We also see the state indices have consolidated below the neutral setting, as the confidence from households in NSW and VIC are eroded. Much of this is connected with falling home prices.

Across our property segmentation, property investors remain the most concerned, with falling home prices, the switch from interest only lending, lower net rental yields and the risks from changes to negative gearing and capital gains all playing in. On the other hand renters are finding some less expensive rentals now, and greater supply. Owner Occupied households are more positive, but still below neutral. This may mark the end of the great property-owning bonanza, at least for now.

Looking across the moving parts of the index, more households are feeling insecure about their job prospects, thanks to pressure in the construction, retail and real estate sectors.

Savings are under pressure from first continued low bank deposit rates, and second, the need to raid savings to keep the household budget in balance. Share values did improve in the month, which offset some of the gloom.

Households are felling the pressure of the high debt (and as the IMF recently showed not just among affluent households). Just under half are now less comfortable with their debt than a year ago, a trend which started to rise in early 2017.

Incomes, in real terms, remain under pressure, with those in the public sector experiencing small rises, but many in the private still in negative territory. More than half say, in real terms, incomes have fallen over the past year.

Costs continue to rise, with power prices, healthcare, health insurance, and child care all registering. Plus we are seeing more fallout from the drought which is also impacting some food costs. Nearly 90% of households said their costs are higher than a year ago.

Finally, we put this all together in our assessment of net worth (assets minus loans etc). 45% of households say their net worth is lower, reflecting falls in the property sector, some lower share prices, and diminishing savings. Not a good look in the run up to an election!

There is little evidence of anything which will change the momentum. Rate cuts and handouts to households may provide some short-term relief, but the economic settings are not correct to reverse the trend. So expect more bad news ahead.

Mortgage Stress Builds Again as Debt Grows

Digital Finance Analytics (DFA) has released the March 2019 mortgage stress and default analysis update.  It’s the continuing story of pressure on households as ongoing wages growth is not offsetting costs of living, and mortgage repayments and total debt continues to rise.

Note: Later in the month we will release mapping showing the percentage of households in stress across postcodes (as opposed to the number estimated to be in stress). We generally avoid this data view because a raw percentage calculation can easily be distorted by postcodes with low counts of borrowing household, but then we have had several requests for this alternative view.

The latest RBA data on household debt to income to December rose to 189.6[1], and remains highly elevated. Plus, the housing debt ratio continues to climb to a new record of 140.2, according to the RBA.  This shows that household debt to income is still increasing.

This is confirmed by the latest financial aggregates recently released by the RBA, with owner occupied lending still growing significantly faster than inflation at 5.9%.

This high debt level, in the context of broader financial pressure, helps to explain the fact that mortgage stress continues to rise. Across Australia, more than 1,044,666 households are estimated to be now in mortgage stress (last month 1,036,214), another new record. This equates to more than 31.6% of owner-occupied borrowing households. In addition, more than 27,775 of these are in severe stress. We estimate that more than 66,700 households’ risk 30-day default in the next 12 months, up 800 from last month. This is as the impact of flat wages growth, rising living costs and higher real mortgage rates hit home.  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 March 2019. 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 forces continue to build, despite reassurances that household finances are fine. This is because we continue to see an accumulation of larger mortgages compared to income whilst costs are rising, and incomes remain static.  Housing credit growth is running significantly faster than incomes and inflation and continued rises in living costs – notably child care, school fees and electricity prices are causing significant pain. Many households are depleting their savings to support their finances.  

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 286,890 households in stress (286,469 last month), VIC 283,753 (278,091 last month), QLD 185,282 (185,424 last month) and WA has 141,199 (139,142 last month). The probability of default over the next 12 months rose, with around 12,600 in WA, around 12,400 in QLD, 16,700 in VIC and 17,700 in NSW.  

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.49 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 3.1 basis points, which equates to $1,045 million from Owner Occupied borrowers. 

A fuller regional breakdown is set out below.

Here are the top postcodes sorted by number of households in mortgage stress.

Handling Mortgage Stress

Households who are in financial difficulty should not ignore the signs. Though many do. And trying to refinance to solve the problem often ends up just postponing the inevitable. 

We think there are some simple steps households can take:

Step one is to draw up a budget, so you can see where the money is coming and going. From our research, only half of households have any budget. This means you can then make decisions about what is most important, and what can be foregone. Select and prioritise.

Step two is to talk with your lender, as they have a legal obligation to assist is case of hardship. Yet many households avoid having that conversation, hoping the problem will cure itself. I have to say, in the current low-income growth, high cost environment, that is unlikely.  And remember rates are likely to rise at some point.

Step three. Work out what would happen if mortgage rates rose by say half or one percent. Pass that across your budget and examine the impact. Then you will really know where you stand. Then plan accordingly.

[1] RBA E2 Household Finances – Selected Ratios December 2018

You can request our media release. Note this will NOT automatically send you our research updates, for that register here.

[contact-form to=’mnorth@digitalfinanceanalytics.com’ subject=’Request The March 2019 Stress Release’][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Email Me The March 2019 Media Release’ type=’radio’ required=’1′ options=’Yes Please’/][contact-field label=”Comment If You Like” type=”textarea”/][/contact-form]

Note that the detailed results from our surveys and analysis are made available to our paying clients.

The Bank Of Mum and Dad Goes Boom!

Latest data released today from the DFA household surveys shows that a smaller number of potential first time buyers are now getting help from their parents to buy property.

This video explains what is going on.

At its height 60% of first time buyers were getting help from their parents, but this has now dropped to 20%. In addition the value of that help has fallen from around $88,000 to around $75,000, on average.

That said the total amount lent by the Bank of Mum and Dad is approaching $30 billion.

This puts the Bank of Mum and Dad among the top-10 lenders in Australia, based on the latest APRA data, in terms of loan stock.

Three drivers explain these changes. First parents are more concerned in a falling market about the equity in their property, when facing into retirement. The “ATM” has run dry. They cannot afford to pass money down the generation now.

Second despite some incentives, such as those in the Northern Territories, announced recently, many first time buyers are preferring to wait, rather than buy into a falling market and risk loosing their deposits. Plus we know that those who get help from parents are twice a likely to default in the subsequent 5 years compared with those who saved.

Third, banks are reluctant to lend, and a seagull payment is not regarded well, compared with a record of regular savings. Some lenders have stopped lending to borrowers with a Bank of Mum and Dad deposit.

Thus we think the momentum we saw last year is slowing and the Bank of Mum and Dad may be a less important factor ahead.

Some parents may decided to help pay monthly mortgage payments instead as this is a more flexible alternative and does not risk capital.

Households Not Banking On Property

We have released the latest edition of our household surveys, looking specifically their attitude to property transactions and expectations. And overall demand, and intention to transact have tanked. More evidence of a weaker market ahead.

Our video provides a complete analysis of the results, but here are the main points.

Intention to transact continues to fall, as property investors continue to step away from the market. Down Traders and First Time Buyers remain active, as do those seeking to Refinance; but overall expect lower numbers of transactions ahead.

As a result, demand for credit is also likely to fall further, as investors walk. Up Traders and First Time Buyers are the main cohorts likely to want a loan, plus some refinancing.

Home price expectations are diving, across all segments, these are the lowest results I have ever seen in the data series. This is a significant shift compared with even 18 months ago. People think property is likely to fall further.

Looking at the barriers to transacting, there are some common themes emerging. Those wanting to buy are being constrained by the lack of available finance. Rising costs of living are also not helping.

First Time Buyers are also finding getting a loan tougher as underwriting standards have tightened. High prices as a barrier have slid a little.

Down Traders are seeking to release equity before prices slide further. This is a big cohort and they are becoming more desperate to sell.

Investors are less convinced by future capital appreciation. Its mainly now tax efficiency which they cling to. Some will be forced to sell, but many are sitting on the sidelines and waiting to see how this plays out.

And barriers now include concerns around regulatory changes and finance avaliability.

So in summary there is nothing here which suggests any type of recovery in home prices. The collapse in prices has already been sufficient to put many households off from future purchases, and those who need finance are finding it hard to get funds. More falls to come.

Nothing here changes our scenarios. More falls. Period.

Household Finance Confidence Slumps In February

The latest from our household surveys reveals a further fall in household confidence, with the data to end February 2019.

The overall index fell to 86.5, the lowest since we have run the series.

The state indices have converged at a level below the neutral setting.

The age groups continue to show younger households are less confident, thanks to low wages growth, high costs and rents or mortgage repayments. Some older groups remain more confident.

Property investors continue to struggle, though owner occupied owners are relatively more confident, even if below the neutral setting.

And all wealth segments are now in negative territory.

We review the moving parts in the index in the video above.