Tag: Mortgage Stress

Digital Finance Analytics (DFA) has released the May 2019 mortgage stress and default analysis update.  Perhaps the rate cuts, rise to the minimum wage, and tax cuts ahead may turn the tide, but so far none of this matters for current household budgets. On the other hand more lending may make budgets even tighter if standards are dropped further.

Once again, it’s the continuing story of pressure on households as ongoing wages growth is not offsetting costs of living, and mortgage repayments as total debt continues to rise. Moreover, the trends have continued post the election.

Across Australia, more than 1,071,829 households are estimated to be now in mortgage stress (last month 1,050,450), another new record. This equates to more than 31.9% of owner-occupied borrowing households. In addition, more than 33,427 (30,413 last month) of these are in severe stress. We estimate that more than 70,502 (last month 70,149) 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 May 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.

Martin North, Principal of Digital Finance Analytics says that now the election results are known, and the dust has settled, we are still seeing the pressures on households 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 297,995 households in stress (284,014 last month), VIC 290,581 (292,114 last month), QLD 193,155 (184,037 last month) and WA has 140,950 (140,836) last month). The probability of default over the next 12 months rose, with around 13,222 (13,135 last month) in WA, around 12,948 (12,936 last month) in QLD, 17,773 (17,611 last week) in VIC and 18,822 (18,703 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 ($1.54 billion), though losses are likely to be highest in WA at 3.1 basis points, which equates to $1,107 million. 

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.

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 May 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 May 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.

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.

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[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 April 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 April 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.

Digital Finance Analytics (DFA) has released the February 2019 mortgage stress and default analysis update.  Unfortunately, the pressure on households continues to rise as weak ongoing wages growth is not offsetting costs of living, and mortgage repayments and total debt still grows. In addition, the number of households in severe stress continues to rise, suggesting a lift in potential defaults later.

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 is confirmed by the latest financial aggregates recently released by the RBA, to end January 2019, with owner occupied lending still growing significantly faster than inflation at 6.2%.

This high debt level helps to explain the fact that mortgage stress continues to rise.

Across Australia, more than 1,036,214 households are estimated to be now in mortgage stress (last month 1,026,106), another new record. This equates to more than 31% of owner occupied borrowing households. In addition, more than 28,903 of these are in severe stress (last month 25,750). We estimate that more than 66,000 households risk 30-day default in the next 12 months, up 3,000 from last month. 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 February 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 the oft repeated view that household finances are fine, the continued accumulation of larger mortgages compared to income whilst costs are rising and incomes static explains the issues we are now seeing.

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, this despite some relief at the bowser. Many continue to dip into savings to support their finances.   We are seeing a rise in households seeking help with their finances, including access to debt counsellors and other advice channels. WA is seeing very strong growth in cries for help, but pain in NSW is also on the rise.

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 40% 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 286,469 households in stress (282,165 last month), VIC 278,091 (278,860 last month), QLD 185,424 (185,493 last month) and WA has 139,142 (139,621 last month). The probability of default over the next 12 months rose, with around 12,500 in WA, around 12,100 in QLD, 16,800 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 3.3 basis points, which equates to $1,048 million from Owner Occupied borrowers. 

A fuller regional breakdown is set out below.

And here is a list of the highest count of stressed households by post code across the country.

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 September 2018