Single-parent families are experiencing a near-unprecedented level of housing stress as soaring house prices force many into unaffordable rental properties.
Analysis conducted by the Melbourne Institute as part of its annual HILDA survey revealed over 20 percent of single-parent families are stretching their budgets further than ever to keep up with annual rent rises or changes in their mortgage.
Amongst all Australians, household stress peaked at an all-time high in 2012, when 11.2 percent of all Australians were classified as having to make “unduly burdensome” mortgage repayments.
In economic terms, housing stress is technically defined as spending more than 30 percent of a household’s disposable income on housing costs, not including council rates.
In 2016, where the HILDA survey data ends, 9.6 percent of the population were experiencing housing stress.
Although single-parent families were found to be under the most dire levels of housing stress, the survey found that single elderly Australians and renters are also suffering under the weight of paying rent or covering their mortgage.
Couples without children were found to have the lowest levels of housing stress.
“Among those with housing costs, private renters have the highest rate of housing stress and owners with mortgages have the lowest rate,” wrote HILDA survey researchers.
“Moreover, over the HILDA Survey period, housing stress has increased considerably among renters—particularly renters of social housing—whereas it has decreased slightly for home owners with a mortgage.”
The survey also found that the type of home you owned or rented was directly correlated to the likelihood of having difficulty in making rent or mortgage repayments.
Australians living in apartments were found to have the highest rates of housing stress, followed by those living in semi-detached houses.
People living in separate, free-standing homes were found to have the lowest rates of housing stress – most likely because they live away from heavily-populated urban centres.
“Housing stress is generally more prevalent in the mainland capital cities, with Sydney in particular standing out,” wrote the researchers.
“However, differences across regions are perhaps not as large as one might expect given the differences in housing costs across the regions.
“Also notable is that housing stress is very high in other urban Queensland. It is only in the last sub-period (2013 to 2016) that it is not the region with the highest rate of housing stress, and even in that period only Sydney has a higher rate.”
The HILDA survey follows the lives of more than 17,000 Australians over the course of their lifetimes and published information on an annual basis on many aspects of their lives including relationships, income, employment, health and education.
The latest findings back up analysis from Digital Finance Analytics (DFA), which estimates that more than 970,000 Australian households are now believed to be suffering housing stress.
That equates to 30.3 percent of home owners currently paying off a mortgage.
Of the 970,000 households, DFA estimates more than 57,100 families risk 30-day default on their loans in the next 12 months.
“We continue to see households having to cope with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment remains high,” wrote DFA principal Martin North.
“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.”
Following on from the SMH article today, The Project also did a segment on the subject, including my comments via a recorded live cross. The issues of mortgage stress and repayments are going mainstream!
When we released our mortgage stress report for June 2018, we said that the number of households exposed to risks is rising, and if rates were to increase then around 1 million of households will fall into stress and some may default, up from 970,000 now.
Members held a detailed discussion of the high level of household debt in Australia, informed by a special paper prepared for this meeting. Household debt has increased by more than household income over the preceding three decades in many countries, but particularly so in Australia. Two key drivers of this trend across countries have been the decline in nominal interest rates, predominantly reflecting lower inflation, and financial deregulation, both of which have increased households’ access to finance. Members noted that a distinguishing feature of the Australian housing market is that the bulk of dwellings are owned by the household sector. This has contributed to greater borrowing for housing by households in Australia compared with other countries, where the corporate sector owns a larger proportion of rental properties. Another feature of the Australian housing market that has contributed to greater borrowing by households is the higher cost of housing in Australia on account of a larger share of the Australian population living in urban centres, typically in large detached dwellings.
Survey data indicate that much of Australian household debt is owed by higher-income and middle-aged people, who tend to have more stable employment and often larger savings buffers. However, members recognised that a material share of household debt is held by lower-income households, which generally have higher debt relative to their income. Household assets in aggregate are valued at around five times the value of household debt and total assets exceed the value of debt for most households. Members noted, however, that most household assets are housing and superannuation, and that both of these are illiquid.
Members noted that high levels of household debt could affect economic outcomes. For example, households with high debt levels are more vulnerable to economic shocks and therefore more likely to reduce consumption in the face of uncertainty about their future income. Members also noted that changes in interest rates have a larger effect on disposable income for households with high debt levels, but that these households may be less inclined to borrow more at times when interest rates fall. Accordingly, members agreed that household balance sheets continued to warrant close and careful monitoring.
In fact our research says, yes, debt is a problem, and it is hitting many different types of household, including more affluent ones.
Our analysis of stress and defaults created a stir in the media, several radio and TV interviews, and some interesting discussions on social media.
One of these, with Peter on Twitter led to a question about how we make our assessment and scenarios and our definitions of mortgage stress (cash-flow based). We include estimates of expected wages growth, inflation, cpi, interest rates etc.
So this led to a discussion where I volunteered to run a scenario using Peter’s parameters.
We also added in the tax changes and child care subsidy (in both scenarios). We do not impose a particular family structure, but capture that in our surveys (which aligns to the ABS census distribution).
So, we ran our model with a 3% wage growth, 2.1% CPI and small rise in mortgage rates. Stress levels would begin to fall, but will still be higher than since 2000, because of the greater leverage and debt burden.
Here are the results, one year down the track.
So the impact of potential wages rises, in real terms is significant. A “good outcome!” However even then the risk in the system remains higher than we have been use to. Defaults reduced by 6% while stress fell by more than 8%.
Yesterday I discussed the issues of bank funding and the risks from a hike in rates in the context of our overall work on mortgage stress. Essentially, if the majors proceed with a ~15 basis point hike in rates, the number of households in mortgage stress will rise from an estimated 970,000 to one million households; plus a consequential rise in subsequent defaults.
We then proceeded to develop the arguments on 2GB…
ABC Radio in Sydney…
and ABC Radio Melbourne.
Some confused stress with defaults… sometimes even simple messages get scrambled.
Channel Nine asked us to run some analysis in and around the Gold Coast, and also included some other post codes in the analysis. The story it tells is an interesting one and also gives us some clues about financial resilience, continuing our last discussion. In particular, we mapped in some of our master household segments, which show how uneven mortgage stress is in practice.
This is based on our household mortgage stress analysis for Queensland to the end of June, and in the past three months’ stress has been rising. When we talk about mortgage stress we are looking at household income and expenditure on a cash flow basis. Those with a shortfall are deemed to be in stress. Today around 27% of households across the state are having difficulty managing their repayment, which is slightly below the national average of 30%.
However, looking first in detail at the Gold Coast, we also see mortgage stress rising but only in some post codes.
The post code with the largest number of households in in 4226 Robina where 1,200 households are in mortgage stress, which is 28% of all borrowing households in the area. Most households here are relatively mature suburban families, with high expenses and contained incomes.
Coomera, 4209 has just 16% of households in mortgage stress and most of these are older, more wealthy households who are finding costs rising and their incomes severely under pressure.
Turning to Surfers Paradise 4217, 18% or 770 households there are in mortgage stress and these are mainly younger affluent households who have brought expensive places, often apartments now the costs of their mortgages have risen, while their incomes are constrained. This is a recipe for disaster later.
The post code with the largest number of borrowing households is 4211 Narang, with more than 10,000 in the district, only 4.1% are in mortgage stress and most of these are older households nearing retirement, when income is more constrained. However, we see a higher risk of default here should mortgage rates rise, because of these income constraints.
Turning to Coolangatta and the surrounding areas in 4225, here we see a larger number of households under pressure, due to lower incomes and high costs – we call then Battling Urban households. As a result, we estimate that more than 50%, or 332 households are in mortgage stress.
And in Southport 4215, where more than 4,800 households are borrowing, only 6% are in difficulty. Here many households are relatively affluent, and many are planning to, or have retired in recent years. However, as a result of this their incomes may become more constrained down the track so there are around 80 risking default over the next year or so.
So now looking across some of the other areas, in Brisbane, post code 4000, around 22% of borrowing households, or 320 households are in mortgage stress. Most of these are young affluent households, with large mortgages and often on high rise apartments. They paid up big for these, but now their incomes are constrained and costs are rising. This is a real problem.
Over in Logan, 4114, around 33% of households are in mortgage stress, that’s higher than the Queensland average, and that’s about 800 households in the area. Households here are in the mortgage belt, mostly with families, and high living costs as well as their mortgages. Once again incomes are constrained. We think more than 30 might default in the next 12 months.
Finally, in Ipswich, 4305, there are more than 8,000 borrowing households in what we classify as the disadvantaged fringe. Many here are battlers, with limited incomes, but still have mortgage repayments to meet. As a result, more than 40% are in mortgage stress which equates to more than 3,200 households, and around 95 may default over the next 12 months.
So you can see how mortgage stress varies across the region and across household segments. My point is, stress is not just confined to the battlers, it is alive and well in more affluent households too. This of course chimes with our national research as we reported last week – see the link here.
Given the fact that incomes are flat, the costs of living continue to rise – especially electricity, council rates, child care costs and school fees, we expect mortgage stress to continue to build. And the prospect of higher mortgage rates down the track makes it even more of a problem.
My advice for those in difficulty is first draw up a budget so you know what you are actually spending, and second remember that banks have an obligation to assist in times of hardship, so talk to them, do not ignore the problem, it is unlikely to go away on its own. Take action early.
Digital Finance Analytics (DFA) has released the June 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] …
… so no surprise to see mortgage stress continuing to rise. Across Australia, more than 970,000 households are estimated to be now in mortgage stress (last month 966,000). This equates to 30.3% of owner occupied borrowing households. In addition, more than 22,000 of these are in severe stress. We estimate that more than 57,100 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.8 basis points, though losses in WA are higher at 5.2 basis points. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates.
The latest S&P Ratings data shows a rise in 90 day plus delinquencies in the SPIN series for April, from the major banks. So despite the fact it only covers MBS mortgages the trend is consistent with our stress analysis!
The inevitable result of too lose lending standards and easy loans is creating an intractable problem for many households given the continued low income growth, high cost environment. This also means risks to lenders continue to rise.
Our surveys show that more households are keeping their wallets firmly in their pockets as they try to manage ever tighter cash flows. This is an economically significant issue and will be a drag anchor on future growth. The RBA’s bet on sustained household consumption looks pretty crook. Even now, household debt continues to climb to new record levels, mortgage lending is still growing at an unsustainable two to three times income. Falling home prices just adds extra picante to the problem.
We continue to see households having to cope with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment remains high. 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. Rate pressure will only increase as higher Bank Bill Swap Rates (BBSW) will force more lenders to lift their mortgage rates, as a number of smaller players already have done.
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.
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.
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.
Stress by The Numbers.
Regional analysis shows that NSW has 264,737 households in stress (264,344 last month), VIC 266,958 (271,744 last month), QLD 172,088 (164,795 last month) and WA has 129,741. The probability of default over the next 12 months rose, with around 10,953 in WA, around 10,526 in QLD, 14,207 in VIC and 15,200 in NSW.
The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($927 million) from Owner Occupied Borrowers, which equates to 2.10 and 2.76 basis points respectively. Losses are likely to be highest in WA at 5.2 basis points, which equates to $761 million from Owner Occupied borrowers.
A fuller regional breakdown is set out below.
Here are the top 20 postcodes sorted by number of households in mortgage stress.
Some Important Context
The rise in 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 most significant area of law discussed by the Commission has been responsible lending. Yet most of the 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. Gill North, Professor of law at Deakin and a Principal of DFA suggests that” APRA (and not ASIC) should be the primary focus of regulatory criticism. APRA has failed to adequately prepare Australia for future financial system instability and its prudential supervision of home lending standards and practices over the last 5 years has been woeful”.
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 will be published by the Federal Law Review, a top ranked law journal later this month.
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 criticism. This paper concludes that “APRA failed to reasonably prevent or mitigate the accumulation of major systemic risks across the financial system and its regulatory approach was light touch at best.”
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[1] RBA E2 Household Finances – Selected Ratios March 2018
Today we walk through the worst postcodes for mortgage stress and add movement and colour with supporting demographic and financial data.
Yesterday we released the May 2018 mortgage stress and default analysis update. Across Australia, more than 966,000 households are estimated to be now in mortgage stress (last month 963,000). This equates to 30.2% of owner occupied borrowing households.
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. Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. 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.
So now we are going to look in more detail, at the most stressed post codes across the country, by counting down to the most stressed area in the country. In each case we will dive into the vital statistics for each location, including population, income mortgage and loan to income ratios, as well as the number of households in stress.
Just outside the top 10 is Victorian post code, 3810, Packenham, with around 4,310 households now in mortgage stress. It is some 54 kms south east of Melbourne. The average home price is around $502,000 compared with $290,000 in 2010. According to the latest census the average age is 32 years and there are more than 12,600 families in the district. The average monthly household income is $5,900, which is below the average in the state as well as nationally. 46% of homes have a mortgage, compared with the Victorian average of 35%. The average monthly mortgage repayment is $1,700, or more than 28% of their average incomes. But 11% are paying more than 30% of their income each month to service their mortgages.
In tenth place is 3029, another Victorian postcode which includes Hoopers Crossing and Tarneit, around 25 kms from Melbourne CBD. There are about 24,600 households in the district, and the average household income is $6,840 a month. The average mortgage repayment is $1,730 or around 26% of the monthly budget although 12.5% are paying more than 30% of their income on repayments. More than 80% of the dwellings are separate houses and a further 15% are townhouses. Nearly 51% of all properties in the area are mortgaged compared with the VIC average of 35%. The average home price is currently around $545,000 for a house and $378,500 for a unit, compared with $462,000 and $330,000 a year ago.
Next we go to WA, 6030 which includes Clarkson, Merriawa and Tamala Park, 34 kms north of Perth. There are 4,597 households in mortgage stress in the area, which is home for around 11,000 households. The average age is 34 years. 86% of the properties here are separate houses, and 14% town houses. 51% of the properties are mortgaged, well above the WA average of 40%. The average income each month is and the average mortgage repayment is 2,000. The average proportion of income going on the mortgage is more than 28% but more than 12% have repayments requiring more than 30% of income.
Next in eighth place is yet another Victorian post code 3350, which includes Ballarat and the surrounding area, It’s about 100 kilometres from Melbourne. In this region there are 4,746 households in mortgage stress. The average property value is $315,000, compared with $281,000 in 2010. There are more than 14,500 families in the area and the average age is 37, line ball with the average across the state. The average monthly income is $5,300, well below the national and state averages. Around 33% of households have a mortgage and the average repayment is $1,408 a month, with an average loan to income ratio of 26.5%, though 5% are above 30%.
In Seventh place we go to Queensland 4350, around Drayton and Toowoomba, about 100 kilometres from Brisbane. There are about 27,000 households in the region and the average age is 37. 77% of the properties here are standalone houses, and a further 15% are townhouses. We estimate 5,054 households are in mortgage stress. The average home price is $470,000, compared with $382,000 in 2010. The average income is $5,300 a month. Around 30% have a mortgage and the average mortgage repayment is $1,510 giving an average loan to income of 25%. Just 4% have mortgage commitment above 30% of income.
Next, sixth is 3037, which includes areas around Delahey, Hillside and Sydenham; around 20 kms north west of Melbourne. Here around 5,317 households are in mortgage stress. Of the 13,000 households in the district, more than half have a mortgage and the average age is 33. The average home price is around $570,000, up from $365,000 in 2010. 80% of properties are standalone houses and a further 18% are townhouses. The average monthly income is around $7,200 and the average mortgage repayment is $1,730, with an average loan to income of 24%. But 13% require more than 30% of their income to service their mortgage.
In fifth place is another Victorian suburb, 3806, Berwick and Harkaway which is around 40 kilometres south east of Melbourne, with 5,461 households in mortgage stress. The average home price is $700,000 compared with $451,000 in 2010. There are around 13,000 families in the area, with an average age of 36. 88% of the properties in the area are standalone houses. More than 47% of households here have a mortgage and the average repayment is $1,850 compared with the average income of $7,600 making the average loan to income about 24%. However, more than 9% are committed to pay more than 30% of their income each month.
In fourth place we go back to VIC again, to 3805, which includes Narre Warren and Fountain Gate, This area is around 38 kilometres south east of Melbourne. Here 5,900 households are in mortgage stress. The average home price is $620,000 compared with $366,000 in 2010. There are more than 15,000 families in the area, and the average age is 34 years. The average household income is just over $7,000 a month, which is higher than the national average. 54% of homes are mortgaged and the average monthly repayment is $1,700 slightly below the national average of $1,755. The average loan to income ratio is around 25%, but 12% are paying more than 30% of their income on the mortgage each month.
Coming third we cross the Nullarbor to WA to 6065. This is the area around Wanneroo, including Tapping, Hocking and Landsdale and is located about 25 kilometres north of Perth. It is an area of high population growth and residential construction mainly on smallish lots. There are more than 6,340 households in mortgage stress in the region. The average home price is $420,000 compared with $529,000 in 2010, and down from a peak of $813,000 in 2014. There are about 17,000 households in the district, with an average age of 33. The average income is $8,300 a month, and 58% have a mortgage with average repayments of $2,170, well above the WA and national averages. The average loan to income ratio is around 26%, but more than 13% are paying over 30% of their incomes on the mortgage each month.
In second spot is the area around Campbelltown in NSW, 2560, which is around 43 kilometres inland from Sydney. Here 6,381 households are in mortgage stress. The average home price is $640,000, up from $320,000 in 2010. Around 20,000 households live in the area with an average age of 34 years. 80% of properties are standalone houses. The average income is $6,100 a month. 37% have a mortgage and the average repayment is higher than the national average at $1,800, or 29% of income. But 13% are paying more than 30% of their income on the mortgage.
So to the post code with the highest count of stressed households, is NSW post code 2170, the area around Liverpool, Warwick Farm and Chipping Norton, which is around 27 kilometres west of Sydney. There are around 27,000 families in the area, with an average age of 34. There are 6,974 households in mortgage stress here. The average home price is $805,000 compared with $385,000 in 2010. 64% of properties are standalone houses, while 22% are flats or apartments. The average income here is $5,950. 36% have a mortgage, which is above the NSW average of 32% and the average repayment is about $2,000 each month, so the average proportion of income paid on the mortgage is more than 33%.
So it’s clear from this analysis that stress is residing among households who are relatively affluent, but highly leveraged, and include a number of newly built high-growth suburbs on the edges of our larger cities. Many are typified by high density standalone houses, or townhouses crammed into small plots. We are seeing a rotation of stress towards some of the Victorian post codes in recent months, but there are concerning rises in both NSW and VIC. However, WA remains the more immediate trouble spot, as can be demonstrated by the higher levels of default there – perhaps close to double the national average.
We will continue to monitor mortgage stress, and will update our core market model next at the end of the year.
As before, I think it is worth repeating that many households in stress do not have a robust household budget, and creating this is an important first step to getting to grips with stress. Whilst putting more on credit cards and refinancing may seem superficially attractive mitigation steps, our analysis shows that these are often only temporary fixes. Getting to grips with where the money is going is an important first step to tackling the problem. Remember too that banks have an obligation to assist in cases of hardship, so if households are in difficulty, they should talk to their lenders, rather than hoping things will work out. Given flat incomes and rising prices, this is unlikely.
