Mortgage Stress – Page 17 – Digital Finance Analytics (DFA) Blog

Mortgage Stress Accelerates Again as Debt Grows

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

Mortgage Delinquencies Higher At Westpac

Westpac released their Pillar 3 report for December 2018, plus data on asset quality funding and capital. Of most interest to me was their mortgage data, which shows loan volume growth slowing, and rising delinquencies. The number of properties in possession rose from 396 to 444 in a quarter!

They said their audited statutory net profit for 1Q19 was $1.95 billion, comparable to 2H18.

They reported net interest margins excluding treasury was higher following repricing last year. There was a weaker contribution from treasury.

Provisions were $4,066 million compared with Sep 18’s $3,053.

On 1 October 2018 Westpac adopted AASB 9 and AASB 15. The models for implementation of these standards are still to be finalised and so current changes associated with implementation are preliminary and may change. These will be finalised with Westpac’s First Half 2019 results.

Some transitional impacts from the adoption of AASB 9 have included: i) an increase in collectively assessed provisions of $974 million; ii) a reduction in retained earnings and an increase in deferred tax assets; iii) a $3.9 billion reduction in risk weighted assets; iv) a rise in reported stressed assets; and• v) a 2 basis point increase in the CET1 capital ratio.

Impairment charge was $204 million. $30m pre-tax in insurance claims for Sydney hailstorms are expected.

Westpac showed the slowing in mortgage lending we are seeing across the majors.

Mortgage Interest only lending was 32% of portfolio at 31 Dec 2018 (down from 35% at 30 Sep 2018). Investor lending growth, using APRA extended definition, 0.8% pa

They have a portfolio of IO loans, some at 10 years plus. 16% expire this year.

Australian mortgage delinquencies were 4 basis points higher over the quarter while Australian unsecured delinquencies were also higher, up 10 basis points. The number of properties in possession rose from 396 to 444 in a quarter!

Australian unsecured 90+ day delinquencies increased to 1.83% (up 10bps over the quarter)

The Group’s common equity Tier 1 (CET1) capital ratio was 10.4% at 31 December 2018. The ratio was lower than the 10.6% reported for September 2018 after payment of Westpac’s final dividend (net of DRP), which reduced the CET1 capital ratio by 69 bps. Excluding the dividend payment, the CET1 capital ratio increased 49 basis points.

Liquidity coverage ratio (LCR) 128%, net stable funding ratio (NSFR) 112%

$16bn of term funding was raised during 4 months to 31 January 2019

Finally, a warning about capital.

Australia’s big banks may struggle to raise the amount of extra capital they require under new rules proposed by the country’s banking regulator, a senior executive at Westpac Banking Corporation said in an interview published on Monday.

The mooted requirements, which the country’s four largest lenders said would mean they need to raise between A$67 billion and A$83 billion over four years ($48 billion to $60 billion) are sound in principle but tough to achieve, Westpac treasurer Curt Zuber told the Australian Financial Review newspaper.

“As we go through cycles, it is potentially problematic for the banks to get the volumes they need in an economic way for the system which allows for the balance we want to achieve,” he said.

Adams/North: The Economic and Social Horrors of Postcode 2570

John and Martin discuss the economic and social horrors that are currently playing out in postcode 2570 which is in the Camden Area (South West Sydney).

The postcode includes the Camden area as well as Oran Park. This postcode got John Adams’ attention after a Sydney Morning Herald article reported earlier this week that the Camden area has seen a significant spike in domestic violence (DV) which the police has said is due to mortgage stress!

This story is intriguing given that John Adams’ was warning in 2018 of massive social consequences from poor economic crisis prior to and after the coming economic crisis.

This is a summary of the full show which we have posted on our new channel “In The Interests Of The People“.

NSW Government to Help Combat Mortgage Stress

An online legal service designed to support borrowers tackling mortgage stress has been launched by the NSW government, via The Adviser.

NSW Attorney-General Mark Speakman has announced the launch of LawAccess NSW, a website designed to offer free legal services to help borrowers overcome mortgage stress and settle rates debts with local councils without being drawn into court proceedings.

According to the government, the LawAccess NSW website provides two interactive guided pathways to match people with the information they need to resolve issues “before they spiral out of control”, with another four pathways on other topics to be released later this year.

“This service is arriving at a crucial time for families facing mortgage stress. The online pathways are convenient and easy to use, with users only needing to answer a few simple questions to get reliable legal information and practical solutions tailored to address their situation,” Mr Speakman said.

“For example, the mortgage stress pathways provide information on budgeting, seeking a ‘hardship variation’ to a loan and tips on avoiding ‘quick fix’ pitfalls that could ultimately cause greater financial pain.”

The government stated that the launch of the LawAccess NSW website is part of the NSW government’s $24 million Civil Justice Action Plan, which it said is “harnessing technology and innovation to make it faster and easier for people to navigate courts and resolve legal problems”.

“The Civil Justice Action Plan has huge potential to reduce stressful and costly legal headaches – particularly for small businesses that are the engine room of the NSW economy,” Mr Speakman added.

“While criminal matters tend to dominate the media news cycle, 85 per cent of legal problems in NSW relate to civil law. So, it’s vital we address these civil issues faced by almost 2.4 million people in this state every year.”

Mortgage Stress Is Breaking More Households

Digital Finance Analytics (DFA) has released the December 2018 mortgage stress and default analysis update.

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.

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”.

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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Mortgage Stress Gets More Extreme In November 2018

DFA has released the November 2018 mortgage stress and default analysis update. Across Australia, more than 1,015,600 households are estimated to be now in mortgage stress (last month 1,008,000). This equates to 30.9% of owner occupied borrowing households. In addition, more than 22,500 of these are in severe stress. We estimate that more than 61,000 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. The latest RBA data on household debt to income to June reached a new high of 190.5[1]. This high debt level helps to explain the fact that mortgage stress continues to rise. 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 November 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Martin North, Principal of Digital Finance Analytics says this rise in stress, which has continued for the past 6 years, should be of no surprise at all. “Continued rises in living costs – notably child care, school fees and food – whilst real incomes continue to fall and underemployment is 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”.

In addition, negative equity is now rearing its head. Data from APRA, the Property Exposures figures – showed that banks wrote nearly 26,000 new mortgages with a loan to value ratio of more than 90%, and a further 51,000 with an LVR of between 80 and 90 percent. That is 20% of all loans written in the same period. I would expect these numbers to fall significantly, as lenders tighten their standards further.

But it’s also worth remembering that in some cases existing borrowers have pulled more equity out to allow them to pass funds to their kids – the so called bank of Mum and Dad, and in the case of a forced sale, the market value may well overstate the true recovery value of the property. Using a property as an ATM does not work in a falling market.

Last month, a Roy Morgan survey of 10,000 borrowers found 8.9 per cent were slipping into negative equity — up from 8 per cent 12 months prior — which would work out to around 386,000 Australians.

We have run our own analysis with data to the end of November and on my modelling currently there are around 400,000 households across the country in negative equity, both owner-occupiers and investors. There are about 3.25 million owner-occupier borrowers and at least 1.25 million investors, so around 10 per cent of properties are currently underwater.

We run a range of potential scenarios, but if our central case works out, with an average fall of 20-25 per cent, our modelling suggests that around 650,000 households would fall into negative equity. My more severe case, if an international crisis hits is for a 40 per cent price fall. Then you’re getting close to one million households. That would be catastrophic for the economy. That’s analogous to what happened in Ireland where prices dropped 40 per cent. A decade later, there are still people in negative equity who’ve never recovered.

Stress by the numbers.

Regional analysis shows that NSW has 281,275 households in stress (272,536 last month), VIC 283,395 (281,922 last month), QLD 181,156 (178,015 last month) and WA has 132,135 (132,827 last month). The probability of default over the next 12 months rose, with around 11,560 in WA, around 11,300 in QLD, 15,300 in VIC and 16,200 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.47 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 3.6 basis points, which equates to $1,000 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.

[1] RBA E2 Household Finances – Selected Ratios June 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.

Mortgage Stress Climbs Again in October

We have completed our October 2018 mortgage stress analysis and today we discuss the results.

The latest RBA data on household debt to income to June reached a new high of 190.5. This high debt level helps to explain the fact that mortgage stress continues to rise. Having crossed the 1 million Rubicon last month, across Australia, more than 1,008,000 households are estimated to be now in mortgage stress (last month 1,003,000). This equates to 30.7% of owner occupied borrowing households.

In addition, more than 22,000 of these are in severe stress. We estimate that more than 61,000 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 October 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

This rise in stress, which has continued for the past 6 years, should be of no surprise at all. “Continued rises in living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment is causing significant pain. Many are dipping into savings to support their finances.”

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.

Regional analysis shows that NSW has 272,536 households in stress (276,132 last month), VIC 281,922 (276,926 last month), QLD 178,015 (176,528 last month) and WA has 132,827 (132,700 last month). The probability of default over the next 12 months rose, with around 11,630 in WA, around 11,300 in QLD, 15,200 in VIC and 16,200 in NSW. The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.74 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 3.6 basis points, which equates to $1,096 million from Owner Occupied borrowers.

Turning to the post codes with the largest counts of households in stress, fifth was Melbourne suburb Berwick and Harkaway, 3806, with 5,267 households in stress and 143 risking default.

In fourth place is Toowoomba and the surrounding area, in Queensland, 4350, with 6,437 households in stress and 256 risking default.

Next in third place is Campbelltown in NSW, 2560, with 6,781 households in stress and 110 risking default.

In second place is Tapping and the surrounding areas in WA, 6065 with 7,409 in stress and 298 risking default

And in first place, the post code with the largest number of households in mortgage stress this month is the area around Chipping Norton and Liverpool, 2170, with 7,732 households in stress and 116 risking default.

As always, it’s worth saying that given flat incomes, and rising costs, and some mortgage rate rises, the pressure will continue, and falling home prices will make things worse. Many people do not keep a cash flow, so they do not know their financial position – drawing one up is the first step and ASIC has some excellent advice on their MoneySmart website. And the other point to make is, if you are in financial distress, you should talk to your lender, they do have an obligation to help in cases of hardship. The worst strategy is simply to ignore the issue and hope it will go away. But in my experience, this is unlikely.

We will update the data again next month.

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.

Mortgage Stress Busts The 1 Million Households

Digital Finance Analytics (DFA) has released the September 2018 mortgage stress and default analysis update. We have just crossed the 1 million, for the first time ever in our history.

The latest RBA data on household debt to income to June reached a new high of 190.5[1]. This high debt level helps to explain the fact that mortgage stress continues to rise.

Across Australia, more than 1,003,000 households are estimated to be now in mortgage stress (last month 996,000). This equates to 30.6% of owner occupied borrowing households. In addition, more than 22,000 of these are in severe stress. We estimate that more than 61,000 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.

Martin North, Principal of Digital Finance Analytics says this rise in stress is to be expected, and should be of no surprise at all. 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”.

“Continued rises in living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment is causing significant pain. Many are dipping into savings to support their finances.”

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 end September 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Stress by the numbers.

Regional analysis shows that NSW has 276,132 households in stress (270,612 last month), VIC 276,926 (270,551 last month), QLD 176,528 (175,102 last month) and WA has 132,700 (134,333 last month). The probability of default over the next 12 months rose, with around 11,589 in WA, around 11,300 in QLD, 15,300 in VIC and 16,252 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.45 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 3.4 basis points, which equates to $1,082 million from Owner Occupied borrowers.

Here is a more detailed regional breakdown.

[1] RBA E2 Household Finances – Selected Ratios June 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.

Mortgage Stress Continues To Build In August 2018

Despite the “good news” from the GDP numbers yesterday, our latest mortgage stress report, to end August 2018 continues to track higher.

The latest RBA data on household debt to income to March reached a new high of 190.1[1]. On Tuesday, the RBA said ”One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high”; and last week “the main risks to financial stability will most likely continue to relate to credit quality. Notably, banks’ large exposure to a potential deterioration in housing loan performance is expected to remain a key issue”.

Our analysis of household finance confirms this and the latest responsible lending determinations also highlight the issues.

So no surprise to see mortgage stress continuing to rise. Across Australia, more than 996,000 households are estimated to be now in mortgage stress (last month 990,000). This equates to 30.5% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 59,000 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.

Recent events, such as the lift in some mortgage rates, the latest council rate demands, rising fuel costs and flat incomes continue to hit home”. In addition, as home prices are falling in some post codes, the threat of negative equity is now rearing its ugly head.

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. As we reported recently, up to 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.

Continued rises in living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment is causing significant pain. Many are dipping into savings to support their finances. The June 2018 household savings ratio, just reported, shows a further fall, at 1%. The ABS says [2] “moderate growth in household disposable income coupled with strength in household consumption resulted in a decline in the household saving ratio to 1.0 per cent, recording its lowest rate since December 2007”.

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 end August 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Stress by The Numbers.

Regional analysis shows that NSW has 270,612 households in stress (267,298 last month), VIC 270,551 (279,207 last month), QLD 175,102 (174,137 last month) and WA has 134,333 (132,035 last month). The probability of default over the next 12 months rose, with around 11,200 in WA, around 10,800 in QLD, 14,700 in VIC and 15,800 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.1 billion) from Owner Occupied borrowers) and VIC ($1.43 billion) from Owner Occupied Borrowers, though losses are likely to be highest in WA at 5.1 basis points, which equates to $744 million from Owner Occupied borrowers.

The Numbers in Context (Responsible Lending).

As indicated in our report last month, mortgage stress does not occur in a vacuum. The revelations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission) have highlighted deep issues in the regulatory environment that have contributed to the household debt “stress bomb”. The Commission will report on an interim basis this month and its commentary on the finance sector and the regulatory structure are likely to be scathing.

Gill North, a principal of DFA and a professor of law at Deakin University “does not expect the Commission to propose major reforms to the responsible lending rules. Instead, she predicts the Commission will consider a range of mechanism to enhance compliance with the existing rules. Conversely, Gill expects the Commission will recommend significant reforms to the law governing mortgage brokers, including some form of best interest duty that requires credit intermediaries to prioritise the interests of the customer when potential conflicts arise.”

The Commission is unlikely to change the responsible lending rules because these regimes have been successfully enforced by ASIC, including actions against the largest banks. For example, in early 2018, a case against the Australia and New Zealand Banking Group was successful, and on the 4th September an action against Westpac was settled prior to the commencement of the court hearing.

In the case against ANZ, the Federal Court found that in respect of 12 car loan applications from three brokers, ANZ failed to take reasonable steps to verify the income of the consumer and relied solely on purported pay slips in circumstances where ANZ knew that the pay slips were a type of document that was easily falsified. The Court indicated that ‘income is one of the most important parts of information about the consumer’s financial situation in the assessment of unsuitability, as it will govern the consumer’s ability to repay the loan’.

The litigation against Westpac concerned the use of an automated decision system to assess home loans during the period December 2011 and March 2015. Under this automated system, Westpac used a benchmark Household Expenditure Measure when assessing approximately 50,000 home loans, instead of actual expense information, and in these instances, the actual expenses were higher than the benchmark estimate. In addition, for approximately 50,000 home loans, Westpac used the incorrect method when assessing a consumer’s capacity to repay a home loan at the end of the interest-only period. Westpac has admitted contraventions of the National Consumer Credit Protection Act 2009 (Cth) and the parties have submitted a statement of agreed facts to the Federal Court.

These cases and other responsible lending actions consistently confirm the need for all lenders to collect and verify a customer’s actual income and expenses. The nature and scope of these obligations are highlighted in ASIC’s Regulatory Guide 209 on responsible lending conduct. This regulatory guide indicates that the obligation for lenders to make reasonable inquiries is scalable and the steps required will vary. For example, more extensive inquiries are necessary when potential negative consequences for the consumer are great, the credit contract has complex terms, the consumer has limited capacity to understand the contract, or when the consumer is a new customer.

A Fuller Regional Breakdown is Set out Below.

[2] 5206.0 Australian National Accounts: National Income, Expenditure and Product

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

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

Household Financial Pressure Tightens Some More

Digital Finance Analytics (DFA) has released the July 2018 mortgage stress and default analysis update. The latest RBA data on household debt to income to March reached a new high of 190.1[1], and CBA today said in their results announcement ”there has been an uptick in home loan arrears as some households experienced difficulties with rising essential costs and limited income growth, leading to some pockets of stress”.

So no surprise to see mortgage stress continuing to rise. Across Australia, more than 990,000 households are estimated to be now in mortgage stress (last month 970,000). This equates to 30.4% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 57,900 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.7 basis points, though losses in WA are higher at 5.1 basis points. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.

Martin North, Principal of Digital Finance Analytics says “households remain under pressure, with many coping with very large mortgages against stretched incomes, reflecting the over generous lending standards which existed until recently. Some who are less stretched are able to refinance to cut their monthly repayments, but we find that the more stretched households are locked in to existing higher rate loans”.

“Given that lending for housing continues to rise at more than 6% on an annualised basis, household pressure is still set to get more intense. In addition, prices are falling in some post codes, and the threat of negative equity is now rearing its ugly head”.

“The caustic formula of coping with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment is causing significant pain. Many households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, and now prices are slipping. While mortgage interest rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises. Many are dipping into savings to support their finances.”

Recent easing interest rate pressures on the banks has decreased the need for them to lift rates higher by reference to the Bank Bill Swap Rates (BBSW), despite the fact that a number of smaller players have done so already.

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 end June 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

The outlined data and analysis on mortgage stress does not occur in a vacuum. The revelations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission) have highlighted deep issues in the regulatory environment that have contributed to the household debt “stress bomb”. However, most of the media commentary on the regulatory framework has been superficial or poorly informed. For example, several commentators have strongly criticised the Australian Securities and Investments Commission (ASIC) for not doing enough but have failed to explain what ASIC has in fact done, and what it ought to have done.

The Commission has highlighted major concerns regarding the law and practice of responsible lending. North has published widely on responsible lending law, standards and practices over the last 3-4 years, and continues to do so. Her latest work (which is co-authored with Therese Wilson from Griffith University) outlines and critiques the responsible lending actions taken ASIC from the beginning of 2014 until the end of June 2017. This paper was published by the Federal Law Review, a top ranked law journal, this month. A draft version of the paper can be downloaded at https://ssrn.com/author=905894.

The responsible lending study by North and Wilson found that ASIC proactively engaged with lenders, encouraged tighter lending standards, and sought or imposed severe penalties for egregious conduct. Further, ASIC strategically targeted credit products commonly acknowledged as the riskiest or most material from a borrower’s perspective, such as small amount credit contracts (commonly referred to as payday loans), interest only home loans, and car loans. North suggests “ASIC deserves commendation for these efforts but could (and should) have done more given the very high levels of household debt. The area of lending of most concern, and that ASIC should have targeted more robustly and systematically, is home mortgages (including investment and owner occupier loans).”

Reported concerns regarding actions taken by the other major regulator of the finance sector, the Australian Prudential Regulation Authority (APRA), have been muted so far. However, an upcoming paper by North and Wilson suggests APRA (rather than ASIC) should be the primary focus of regulatory criticism. This paper concludes that “APRA failed to reasonably prevent or constrain the accumulation of major systemic risks across the financial system and its regulatory approach was light touch at best.”

Stress by The Numbers.

Regional analysis shows that NSW has 267,298 households in stress (264,737 last month), VIC 279,207 (266,958 last month), QLD 174,137 (172,088 last month) and WA has 132,035 (129,741 last month). The probability of default over the next 12 months rose, with around 11,000 in WA, around 10,500 in QLD, 14,500 in VIC and 15,300 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($943 million) from Owner Occupied Borrowers, which equates to 2.10 and 2.7 basis points respectively. Losses are likely to be highest in WA at 5.1 basis points, which equates to $744 million from Owner Occupied borrowers.

Top Post Codes By Stressed Households

[1] RBA E2 Household Finances – Selected Ratios March 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.