The official story is that lower interest rates are translating to reduced financial stress in the community. The true story, as revealed in the latest edition of our mortgage stress analysis is that more households are up against it, with a record 32.9% of mortgages households wrestling with cash flow issues. This translates to 1.08 million households in stress, and more than 82,000 risking default in the months ahead.
Many households are chasing their tails, in that while mortgage repayments are dropping – for some, rising living costs and flat real incomes are compounding their financial pressures. There was a sharp downturn in take home pay, thanks to bushfires and the virus is beginning to hit businesses, (who in turn are less able to pay and retain staff, especially those on “flexible” contracts).
Across our master household segments, the highest proportion of households under pressure are “Young Growing Families”, which includes many recent first time buyers, “Battling Urban” – those older households living in the main urban corridors, and “Disadvantaged Fringe” households, those living in the often new fringe developments are also at the top of the list. That said, stress takes no prisoners, in that even some wealthy households, and more mature families are also under pressure.
Across the states, the highest proportion of households are in Tasmania, where the recent run up in prices, against high costs and low wages is a nasty cocktail. As yet though defaults remain low here. Western Australia has a significantly higher level of defaults, because the financial pressures have been running for years. The largest counts of stressed households are located in Victoria and New South Wales, with Queensland also seeing a further rise. Defaults are expected to rise again.
Across the regions, there are considerable variations, with a significant spike in some areas following the recent bushfires.
The top 20 post codes reveals that WA post code 6065 which includes Tapping and Hocking tops the list this month, with more than 7,000 households impacted. Liverpool, 2170, in New South Wales, Narre Warren 3805 in Victoria and Toowoomba 4350 in Queensland are all at the top of the list. The common theme here is significant and recent higher density development, large mortgages and over priced real estate (and supported by insufficient infrastructure).
As always we remind households that maintaining a cash flow record is an essential tool to managing a household budget – there are good tools available on ASIC’s Money Smart Web Site. Less than half of the households surveyed know their financial status. Careful prioritisation, and repaying higher interest debts first often makes the most sense, especially when wages growth will remain sluggish (and before the economic impact of the virus really hits). Finally, refinancing may provide short term relief, but without a change in behaviour this will not be long lasting.
The latest results from our household surveys to end the end of January reveals that mortgage stress continues to push higher with 32.8% of households now impacted, representing more than 1.1 million borrowing households. In addition expectations of defaults are up to more than 83,400 over the next 12 months.
These results are of no surprise, given the ongoing pressure on incomes and rising costs, despite somewhat lower mortgage rates for some borrowers. The banks of course are deeply discounting rates for new loans, but many borrowers are unable to access these “cheap” deals and are stranded on more expensive rates.
Whilst some households who are not stressed continue to pay mortgages down ahead of time (which is why many claim all is well in mortgage-land), the hard fact is that one third of households are facing ongoing financial pressures. These households are not reducing their debt, rather in some cases they are turning to additional finance to try and bridge the cash-flow gap. Or they are raiding savings if they have them, and are putting more on credit cards.
We analyse mortgage stress in cash-flow terms. If a household is paying out more each month including the mortgage repayments, compared with income received, they are in stress. This is not defined by a set proportion of income going on the mortgage. They may have assets they could sell, but nevertheless in cash-flow terms they are underwater.
Mortgage stress continues to be visible across most of our household segments, with more than half of young growing families exposed (56%), and this includes a number of recent first time buyers.
Those in the urban fringe, especially on new estates are also exposed (50%) but the largest cohort are in the disadvantaged fringe, where incomes are below average as well. More than 300,000 households in this group are exposed, comprising 47.2% of all household in this segment.
Stress also appears in our more mainstream groups, though at a lower level, and we also see our most affluent segments over-leveraged, with 24% of Exclusive Professionals (the most affluent group) and 10.7% of Young Affluent households impacted. In fact our predicted bank losses are more extreme in these groups, as they have larger mortgages and multiple properties.
Across the states, 36.9% of households in Tasmania are registering as stressed, which equates to 31,700 households exposed, followed by South Australia at 34.1% (99,700) and Western Australia at 33.6% or 152,000 households. In TAS and SA prices have remained elevated relative to income and housing affordability continues to deteriorate. Victoria has more than 305,000 household in stress, or 32.9%, while Queensland has 193,000 (28.1%) and New South Wales 304,000 (27.3%). The highest rate of default (a forward-looking estimate over the next 12 months) is in WA at 4.2%, while the national average is 2.2%.
Across the regions, Regional Queensland, Horsham (VIC), Alice Springs and the Southern Half of Tasmania recorded the highest proportion exposed. But the main urban centres of Melbourne, Sydney, Brisbane and Adelaide had the highest counts. Default rates were highest in Curtin WA at 5% and Brand WA (4%). This is driven by multiple years of poor economic performance across the state and underscores that mortgage stress is a precursor to defaults, which tend to occur significantly later. The majority are still working, though income is under pressure. Given current economic headwinds and settings, we expect defaults to continue to rise.
Finally, across the most stressed post codes, WA 6065, which includes Tapping, Wangara and Wanneroo recorded 50% of households in stress, or 7,360 households, followed by Queensland postcode 4350, the area around Toowoomba with 7,000 households in stress, NSW post code 2560, the area around Campbelltown with 6,900 households in difficulty, or 59% of households, and then Victorian post code 3805, the area around Narre Warren, with 6,200 households in stress, which is equivalent to 53% of households.
Most of these areas are fast-growing highly developed suburbs, often on the fringes of our major centres, with many relatively newly built properties on small lots, and often with little local infrastructure. As a result, a significant proportion of income goes on transport costs, and so despite many households having above average incomes, their larges mortgages and high expenses are putting them under continued severe pressure.
Finally, a couple of comments for those in stress, bearing in mind many we survey seem unaware of their plight, because they do not maintain a cash flow. So step one is to draw up a cash flow of money in and money out – ASIC’s Money Smart web site has some excellent tools. Next prioritise spending, and focus on repaying high interest debt (like credit card debt). Third, be cautious of refinancing and restructuring as while this may provide a short term path to relief, unless households in difficulty change their behaviour, it will not be a long-term fix. And finally, do not count on income growth ahead, as given the current economic conditions across the country, we expect wages to remain lower for longer.
And this is a warning too to those contemplating the new first owner incentives. Be conservative in your cash flow estimates, do not count on automatic income acceleration. This would be a path to mortgage stress sooner rather than later.
We plan to publish some stress geo-mapping in a later post.
We are releasing the results of our rolling household surveys, which were completed before the latest round of bushfires started raging. Nevertheless, the results are a concern because the total number of households registering as financially stressed rose again, to 32.7% of borrowing households. This represent 1.1 million households across the country and a predicted default count of 83,220, despite lower cash rates, and some deeply discounted mortgages.
Stress is assessed in cash-flow terms, and when money in is not sufficient to cover the costs of the mortgage and other regular outgoings, the household is flagged as stressed. Granted they may have the capability to tap into deposits, pull down on credit cards, or even sell property, but on a regular basis they are in strife. We find a significant gap between those we assess as at risk, and those who believe they do have financial difficulty. Many adopt the head in the sand approach and hope things will improve, but given the current economic outlook, we think that is a courageous stance to take.
The RBA reported their E2 Selected Household ratios to September just before Christmas and weirdly, the entire debt to income ratio series was restated lower, not just the current quarter, but back through the series. As a result the average debt to income ratio dropped from 191 to a still high 186.5. We always have a issue with this series because it includes small business and households without borrowings, but the downshift in the series is quite significant, and unexplained. I have written to the RBA asking for an explanation. Note this is not the first time the series has been revised down, yet they do not include any explanation in the dataset.
Across the states, NT, SA and TAS recorded the highest proportion of households in difficulty, though WA has the highest default probability risk over the next 12 months at 4.2%, whereas the three most populous states, VIC, NSW and QLD sat at 2.2%. Victoria proportionally to New South Wales has a higher mortgage stress reading.
Among the DFA household segments, 57% of young growing households are in mortgage stress, and within this group there is a large cohort of first time buyers. 2.5% of these households risk default in the next 12 months.
47.5% of battling urban households are also in mortgage stress, and 1.7% risk default ahead. Many of these households occupy properties in the urban fringe, often on newish high density estates. The largest cohort is the disadvantaged fringe group, with 300,000 households in stress and 13,00 risking default. Stress continues to build in our more affluent segments too, with young affluent households at 11.3%, or 4,400 households and exclusive professionals at 21.5% in stress and 3.4% risking default. Losses from this exclusive group are expected to be as high as $1 billion dollars, and is the most value exposed group from a lender perspective.
Across the regions, the Central West of Queensland has 75% of households in stress, but only 300 households, followed by Alice Springs at 65% with around 2,000 households exposed.
In the larger urban centres Adelaide has 35.9% of households exposed, which equates to 75,000 households, followed by Brisbane and Moreton Bay at 29.2% or 148,000 household, Melbourne at 28.9% or 213,000 households and Sydney at 26.9% with 178,000 households under stress.
And across the top post codes, Toowoomba 4350, is the highest count at 7,300 households, or 48%, followed by Liverpool 2170 at 49% or 7,080 households, Fountain Gate and Narre Warren 3805 with 6,918 households or 59% and in WA Hocking, Tapping and Wanneroo with 45% of households equating to 6,732.
Given the current economic settings we expect stress to continue to rise. And shortly we will be looking at the latest household financial confidence index from DFA, which continues to highlight challenging times for more and more households.
But in closing, as I often say, households would do well to draw up a cash flow, to identify money in and money out, determine which spending is essential and prioritise accordingly. And remember, if you are in financial difficulty banks have an obligation to assist, so go talk to them, early. Avoid the head in the sand posture, as it leaves other parts horribly exposed!!
Following our recent update on household mortgage stress, it’s important to broaden our scope into other areas of household financial stress. Just as mortgage defaults rise, power disconnections rise too.
In this report Mitch Grande examines the evidence. Mitchell is a recent Graduate of Politics, Philosophy, Economics (Honours) at the University of Wollongong and is concerned with Australian public policy, and especially energy policy.
Disconnections:
The ABC recently published an article on Western Australia’s record number of
households having their power shut off. For measure, WA’s mortgage stress has
reached 34.3% (145,000), as local economic conditions continue to deteriorate. We
suspect mortgage stress is well correlated with households being disconnected
from their power supply and compounding cost of living pressures through power
bills.
The
article spoke of one 1 in 60 WA households being cut off following unpaid
bills. WA’s state-corporations and largest retailers, Synergy and Horizon
Power, stated that over 22,000 customers had their power shut off in the past
year. This is a two-fold increase in state disconnections in the last three
years. The article cites year-on-year increases to the average WA electricity
bill of +11% (2017), +7% (2018), and +1.75% (2019); while salaries at best
increased +1%. It is important to note that WA is not included in National
Energy Market operations and trading, and as such, the government regulates
Synergy and Horizon Power’s prices of residential and larger customers, setting
the fees and charges annually in the budget. Most recent changes are as follows:
Other research on household energy stress by Alviss consulting with St Vincent de Paul, which does not include Western Australia, examined disconnection data for Victoria, New South Wales, Queensland, and South Australia. In short, their research found many regional and rural hubs at risk, as these postcodes, especially in the last three years, have experienced the most disconnections. The reason behind the regional cost profile is burgeoning network costs, with polls and wires being old, inconsistent, and ‘gold-plated’ over much longer distances than metro customers.
The
Alviss report categorises two types of disconnections: raised disconnections
and completed disconnections. However, the ABC report on WA only speaks to
“power being shut off”, so it is hard to compare the data uniformly. Nevertheless
both reveal the same story of financial hardship in small rural postcodes, perhaps
struggling with the agrarian shift and general economic stressors of poor
revenue poor wages, high costs, and burdens. Both the ABC article and Alviss
report speak to these at-risk households entering stress spirals, in which
regional folk are ‘too proud to seek help’ in either welfare or drug and alcohol
abuse.
The
average postcode profile consisted of lower local incomes, higher unemployment
rates, and relatively more housing affordability issues. A such, the average at
risk household was demographically older, had less economic opportunities, and
lower incomes.
State-by-state
the Alviss report found that:
Victoria had 43.8% of reported customers face
raised and/or completed disconnections.
Werribee (3030) topped the table with 10,424
raised and 5,097 completed.
NSW had 36.7% of its customers face raised
and/or completed disconnections.
Orange
(2800) had the most with 17,902 raised and 6,435 completed.
South East QLD had 30.3% of its customers face
raised and/or completed disconnections.
Caboolture (4510) had 7,587 raised and 2,541
completed.
But Logan (4114) had the highest completed with
2,552 of 7,152 raised.
SA had 30.2% of its customers face raised
and/or completed disconnections.
Salisbury (5108) had 3,956 raised and 952
completed.
But Elizabeth North (5113) had highest
completed with 1,524 of 3,953 raised.
This points to larger lingering issues in SA in
which more than 10 of the top 30 disconnected postcodes are middle suburbs
(5085, 5112, 5113, and 5114).
The
higher completion of disconnection rates reflects far greater then understood
financial hardship, retailers more readily disconnecting households, and
networks being more readily and efficiently able to disconnect consumers. Here
at DFA we have the data available to investigate this financial hardship,
through the survey data on mortgage stress.
DFA survey data breakdown:
From our
most recent DFA survey data, those most affected by power costs include:
the Battling Urban (34.3% surveyed);
the Disadvantaged Fringe (35.6%);
Rural Families (23.7%);
Stressed Seniors tied between power costs
(35.8%) and healthcare costs (35.8%); and
Young Growing Families (35.8%).
This
comes, largely, as we might expect, with young families in growing urban areas,
seniors and those in regional areas struggling with cash flow, and pockets of
disadvantaged and battling segments overburdened by power costs. The
distribution of these segments is largely consistent with the Alviss data,
particularly in Rural New South Wales and the Battling Urban of South
Australia.
All of
these segments (except rural families) whose power costs were the largest
stressor had mortgage/rent stress as their next most outstanding strain with:
Battling Urban (18.3%);
Disadvantaged Fringe (24.7%);
Stressed Seniors (sans healthcare cost (35.8%))
with (11.8%); and
Young Growing Families (21.9%); while
21.7% of Rural Families had fuel and transport
costs as their next highest stressor, whereas mortgage/rent costs affected
19.1%.
In the
other segments, which surveyed a higher cost than power costs, the distinction
is clear:
40.2% of Exclusive Professionals had higher
mortgage/rent cost stress than power costs (8.5%) with the next highest portion
reporting school fees/childcare (21.8%);
Mature Stable Families surveyed higher stress
from mortgage/rent costs (38.8%) than power costs (15.3%) which was their next
highest;
Multicultural Establishments had higher
mortgage/rent stress (30.4%) which was higher than power costs (21.9%), the
next highest result;
the Suburban Mainstream surveyed 24.4%
mortgage/rent costs compared to power costs (17.6%), where their next highest stressor
is school fees/childcare (17.8%);
Wealthy Seniors with (34.3%) mortgage/rent
costs, followed by healthcare (21.4%); and finally
Young Affluent in mortgage/rent costs (46.2%)
followed by their next highest, power costs (12.9%).
These
segments, too, largely come as no surprise with Mature Stable Families not
facing disadvantage, unlike the inner-city postcodes of South-East Queensland.
Or, Wealthy Seniors facing some degree of housing affordability in Rural or
Regional Victoria.
AEMC, AER, and Canstar:
A 2018 Australian Energy Market Commission (AEMC)
report modelled that in the next
two years emerging wind and solar capacity will drive down residential
wholesale prices by $55, offsetting marginal increases in the supply chain like
coal plant retirements, burgeoning network costs, and minor environmental
costs. The 2019 national weighted average consumption level for
residential consumers was estimated at 4,596 kWh per year. And at this
consumption level, the national average annual residential bill in 2017-18 was
$1,384 exclusive of good and services tax (GST) and $1,522 inclusive of GST.
However,
the lived reality for many households, on average, far exceeds these averages. One
way we can be certain of this is the Australian Energy Regulator’s own data on
disconnections: for NSW, SA, QLD, the ACT, and Tasmania 70,000 residential
customers had their supply disconnected between 2017 and 2018. These
disconnections are seasonally dependent, however more uniformly than we might
expect: there are slightly more disconnections raised in autumn (27.8%) and
summer (26.6%) than in spring (23.0%) and winter (22.6%). And then from the
more recent Alvis report and ABC WA article, we find that renewables easing the
wholesale price is not being felt – especially by regional and rural
households. To be clear, the private development of renewables is making enormous
strides in the alleviation of power costs, however, the rather incongruent
policy leadership in a number of other spaces is directly counteracting this.
By
taking a quick glance at Canstar, average annual bills are anywhere from $80 to
$370 greater than the AEMC’S estimates for the same average consumption – and
have increased.
Despite
the AEMC claiming observable declines in average household prices, postcodes
and households across the National Energy Market experience higher real bills
due to sluggish wages and are themselves burdened by inconsistent policy
frameworks that fail to implement meaningful market-based solutions or improve
the cost of living. The fact of the matter is that household disconnections in
all states is increasing.
Recently, the AEMC published their annual report for 2018-2019, which showed that consumers who are willing and able, have engaged in consumer-side uptake of solar PV and batteries. This is causing a positive decentralisation of energy grids (e.g. microgrids, peer-to-peer, virtual powerplants) and alleviation of power prices. In short:
“The technology revolution offers opportunities
and benefits for customers to take control of how they buy, sell and use
energy. Over time, this should allow for greater utilisation of the existing
stock of generation and network capacity, lowering average costs for all
consumers.”
However,
this is not without its challenges. The AEMC signal to a more complicated shape
of daily consumer demand and daily generator supply due to the decentralised
frequency and voltage; the necessity of a new power system management in
replacing old and inadequate capacity; getting proper connectivity to new
remote wind and solar projects; and the ever-elusive unpredictability of
weather patterns on day-to-day demand. As well, those households who are unable
to purchase household solar and/or batteries are beginning to be left behind,
worsening bad market conditions.
In all,
these challenges can be adequately met with coordinated and purposeful
investment in solar/battery integration and security. For instance, improving
grid access to those least-cost sources; fixing security challenges present in
the system, like network infrastructure; or maintaining incentives vis-à-vis
the needs of the system, like decentralised control of household’s bills with
smart technologies all will alleviate prices.
The Federal Governments’ Policy Angle
Going
into the election, the Coalition alluded to three policy options in order to
lower power prices: removing standing offers (dubbed a loyalty tax);
underwriting new reliable investment (painstakingly trying not to call it
subsidies); and ‘big stick’ divestment policies aimed at big gen/retailers who
either ‘price game’ or stray from Angus Taylor’s ‘reliable’ mantra. Rather
critically:
“The Coalition’s
fixation on energy prices is no doubt politically effective, as it both appeals
to people’s hip pockets and works as a scare campaign against taking action on
climate change. But it also obscures another significant, and not unrelated,
economic reality.”
Coming
from an ACCC report that “the standing offer is no longer working as it was
intended and [that it] is causing financial harm to consumers…” the government claimed that: “On 1 July 2019, 800,000 Australian families
and small businesses will benefit from lower electricity prices by moving to
default market offer electricity contracts saving households up to $481 in
South Australia and up to $663 in NSW and South East Queensland. Households changing to default market offers
from standing offer tariffs will save up to $481 in South Australia and $663 in
NSW and South-East Queensland…”
Not only
is this marginal in the grand scheme of energy consumers, it has required an
equalisation across the entire NEM. That is, people on “confusing discounts”
will have those reduced in order to maintain retail profits, stating: “customers
on standing offers and market offers that were above the default offer would be
better off, customers on lower priced market offers would be worse off”. The
AEMC and ACCC’s own data showed that the percentage of consumers on standing
offers was declining rapidly and organically.
“All
jurisdictions are likely to have less than 10 per cent of residential customers
on standing offers within the next two years. The Commission also notes that
there exists a segment of the market (approximately two to four per cent of all
residential customers) who are on standing offers for only a short period when
they move house or create a new connection and have not yet selected a market
offer.”
The
Government signalled to “savings built on price cuts of up to 15 per cent
secured by the Morrison Government for more than 500,000 families and small
businesses from 1 January 2019 – and our ban on sneaky late payment fees that
will save some customers up to $1,000 a year…” in that “small Businesses
changing to default market offers from standing offers will save up to $457 in
South-East Queensland, $878 in NSW and $896 in South Australia.” Despite this,
disconnections and household power costs stress have uniformly risen.
The
government and the ACCC urged consumers to still shop around for market offers
that are almost always cheaper than these default market offers.
“In particular, higher proportions of rural and small
business customers remain on standing offers. In contrast, the percentage of
hardship customers on standing offers is approximately half that of all other
residential customers.”
This is
coupled with underwriting new “reliable” generation, expected to reduce NEM
wholesale prices by a quarter by 2021 – however, whether the government is
subsidising the right wholesale generation capacities is another question
entirely (they’re not). As well, the government has introduced the Energy
Assistance payments to welfare recipients which emphasises a price safety net:
“banning retailers from offering confusing discounts, protecting customers in
financial hardship and requiring energy retailers to notify customers when
their discounts are about to finish or change.”
The
government appears more concerned with tinkering with peoples’ demand (a la the
first home buyers’ scheme). In doing so they are inflating average demand
profiles, not managing the market-wide issues in supply.
Being
seven months after the election, and five months since the default market
offers were introduced, the AEMC optimistically signalled to wholesale price
easing countered by burgeoning costs in the network and retail profiting – whereas,
on average, the consumers’ bill has increased in the eyes of financial
comparison cites and segments of the population surveyed by DFA report higher power
cost stress.
The
optimism is not lost in the media: with David Crowe, just in September, writing a piece stating that bills are falling
$130 a year thanks to the Morrison governments’ “industry crackdown.” Crowe
writes: “The price rules came into effect on July 1 and have already cut the
standard offers for electricity customers, with some NSW households saving $130
a year. Some Victorian customers have seen their offers fall by medians of $310
to $430 depending on the retailer.” But immediately, Crowe states that not all
customers are going to have reduced bills, just those that were on existing standing
offers – meaning that those on existing discounted retail rates have since had
their bills increased to equalise the burden. Whether this is observable in the
mass of disconnection figures or household stress is uncertain.
In the face of this optimism is the reality that power costs continue to burden
a majority of segments in Australia and average bills continue to rise, as ad
hoc policies have all but decreased the average bill. This is mainly because of
the new policy directions under Taylor and Morrison, which deal more in threats
and subsidies than they do in proper market-based or evidence-based
policymaking. The governments new direction fails to address the largest
inflators of household power costs, which are the overinvested gold-plated
regulated asset base, burgeoning wholesale costs from aging coal-fired power,
and extraordinary retail costs/profits – the latter of which the ACCC and AEMC reject, simply because ‘the market is competitive’. In
that same report, the ACCC and AEMC flag the long-term risks due to legislating
default market offers, including:
increased risk to retailers driving higher
financing and overall costs
lower levels of innovation leading to less
available products and services
higher barriers to entry and changes to
consumer behaviour resulting in decreased competition.
AEMC
were happy with retail competition (2019), for the market’s improved
simplicity, stable price deals, and removing confusing offers creating “a more
engaged market that is responding positively to greater product innovation and
bundling – and producing positive outcomes.”
5. Final Remarks
As a
portion of average household expenditure, electricity costs have risen to 50%
from 2006 to 2016. The ABS found 10% of those surveyed reported difficulty in
paying bills in 2015-2016. In 2013, ABS also found 10% “chose” to restrict
heating and cooling. These figures alone reaffirm the DFA thesis that Australia
is experiencing poor wage growth, underemployment, low productivity, record
levels of private debt. And when this is applied to poor innovation in the
energy sector, a maintenance of minerals-based growth, and a reluctance to
properly do what is needed
Across
all household types, less are able to pay electricity/gas. There is a negative
association between net wealth and indicators of energy-related financial
stress 1st quintile ‘chose’ to restrict heating / cooling. Renters
and mortgage holders are at observably greater risk of energy-related financial
stress, ‘choosing’ to forgo consumption. Solar panels substantially reduce their
difficulties, however, it is only available to those who can afford it, while
those who can’t are left to the market.
As the
DFA data shows, the surveyed segments are divided along two key groups: those
with Young Families in growing urban areas, Seniors and those in regional areas
struggling with cash flow, and pockets of disadvantaged and battling segments who
are overburdened by power costs. And on the other hand, those Exclusive
Professionals, Mature Stable Families, Multicultural Establishment, Suburban
Mainstream, Wealthy Seniors and the Young Affluent who are more burdened by
mortgage/rent costs.
In summary,
summer bodes very poorly, with shocks from old coal-fired power very likely spiking
prices unpredictably along outdated yet gold-plated interconnectors. Any price
movements across states, such as a brown out, through the NEM will be
infectious, as interconnectors deteriorate and fail to distribute new renewable
projects of higher efficiency. Existing coal generation is increasingly
unreliable and expensive, as the fleet continues to retire, and governments
fail to make investment into sufficient new generation or systems reliability. The
policy void in wholesale and gas markets will mean that higher prices and
system risk will continue, as the market and industry signals for proper
investment and legislative certainty.
DFA has released our mortgage stress survey results to the end of November. And after a couple of months going sideways, thanks to some rate cuts and tax refunds, the trajectory has gone sharply higher again this month.
One factor which is now biting is the switch from interest only loan to principle and interest loan repayments, which has lifted average monthly repayments by more than 20% for some. In addition the underemployment and unemployment factors are playing in, as is the drought. In fact, the drought now appears to be right up there in terms of directly hitting regional unemployment as well as lifting food prices more generally. This all suggests that even more stress is baked in ahead.
The proportion of households now in mortgage stress, based on an assessment of their cash flow (money in, compared with money out, including mortgage repayments where appropriate), has now lifted to 32.5% of households.
This equates to 1,082,000 households, the highest ever measured in our surveys. Worse, more are slipping into risk of mortgage default, according to our forward modelling*. More are also in severe stress, reaching over 80,000 for the first time. These households are more likely to default ahead.
Household debt to income remains at an all-time high. In addition, more continue to raid deposits to make ends meet.
Across the DFA household segments we continue to see some variations between cohorts. Young Growing families have the highest stress, and many first time buyers are represented in this group. The largest counts are located on the urban fringe, and many of these households are living on newly build high density estates. However, stress continues to spill over into more affluent groups, and here the impact of the IO loan switch is quite strong. Some of these are living in the high rise sector, where construction issues are also biting.
Across the states Tasmania has the highest proportion in stress, thanks to low wages, and recent price hikes, but the largest number of households in any one state is in Victoria. However, the default rates look to be rising faster in Sydney, where values are more extended relative to incomes.
At a regional level, the largest counts are in the main urban centres of Melbourne and Sydney as expected, although stress is spilling out more widely into regional centres.
And our top post codes continues to centre in on the urban fringe, with Campbelltown, Toowoomba and areas around Melbourne including Berwick and Narre Warren all showing the largest counts of stressed households. Cranbourne 3977 has the highest count of potential defaults this month. Postcodes in WA are still under pressure as the economic grind continues.
*Note: last month we briefing misreported the household stress figure at 1.77 million not 1.07 million. This was corrected within a few moments of posting. You can see the previous post here.
We have released two videos today which summarise our latest household research.
Note at the 3 min mark I misspoke on the stress data – should be “shows a further 7,000 household fell into stress taking the total to more than 1.07 million households or 32.2%”
After talking a breather last month, thanks to rate cuts and tax refunds (minimal those these were in practice), the results from our surveys for October shows a further 7,000 household fell into stress taking the total to more than 1.07 million households or 32.2%
Household debt is at record highs, and while costs are still rising, incomes are not in real terms. There was a spate of refinancing which helped some households but the bulk of these were NOT in stress in the first place. The rejection rates for those in mortgage stress are and remain consistently higher.
Mortgage stress is assessed on a cash flow basis, where, based on our 52,000 household rolling annual survey we measure income and outgoings for households, including mortgage repayments. Where the cash flow is net negative, households are in stress. They are required to draw down on savings, put more on credit cards or hunker down – one reason the retail sales data yesterday at o.2% in September was so weak. Stress is based on current circumstances.
We also model the probability of default ahead over the next 12 months, which is a predictive estimate and we expect defaults to continue to rise – we are seeing worrying signs in both New South Wales and Victoria now as economic conditions in these states weaken. Job losses in retail and construction are leading the downturn. But underemployment is widespread. On the other hand, Canberra, with higher public sector wages, is more insulated from the reality elsewhere.
Across our household segments more than half (56.5%) of Young Growing Families are in stress, accounting for more than 166,000 households; followed by Battling Urban at 48.9% or 76,000 households and Disadvantaged Fringe at 48%, with nearly 300,000 household. Rural households are under pressure thanks also to the drought, with 25.6% in mortgage stress, or 78,500 households and even the most affluent segment – Exclusive Professionals are 24% in stress with 54,600 households. In other words mortgage stress is appearing in every sector of society.
Across the states the highest proportion of households in stress are located in Tasmania (39%) and Northern Territories (36.9%), although the number of households is relatively low. New South Wales now has nearly 300,000 households in difficulty or 28.3% of households, and Victoria has 296,000 households in stress or 33.1%. We have been tracking the spike in Victoria in recent months. However, Western Australia has 34.3% of households in stress, or 145,000 households and conditions continue to deteriorate there with more foreclosures in train, as banks speed up their resolution processes.
We analyse stress to post code level, and can identify those postcodes with the largest count of stressed households. Post code 2560 – the area around Campbelltown has the highest count, with 7,300 in stress or 63% of households. Next is Melbourne post code 3805, including Fountain Gate and Narre Warren with 6,600 stressed households representing 57.8% of households. Third is Toowoomba in Queensland with 6,500 households, representing 44% of households in the district, and fourth is 2170 around Liverpool in New South Wales with 6,300 in stress or 44.8% of households. A common characteristic are areas of high urban expansion on the fringe, with many new builds competing with existing property, and many recently purchased. That said, stress can take several years to emerge, and there are pockets of pain from purchases made several years ago.
Finally, we also examined the expense drivers of stress from our surveys. These vary across the segments with power prices, school fees and child care, all significant, as well as housing costs overall.
This is likely to drive stress higher unless real wages start to improve, but given the current economic outlook that appears unlikely for now.
We spent today in Sydney presenting our analysis to fund managers and hedge funds. We reviewed our latest household surveys, and discussed the evolving property market. This is a summary of our day.
