Tag: Mortgage Stress

The Latest Top 10 Post Codes In Risk Of Mortgage Default

Today using our latest mortgage stress and probability of default data, we explore the top ten highest risk post codes across the country. Specifically, we look at where we expect the largest number of mortgage defaults to occur over the next few months.

We explore the latest mortgage stress and default modelling, using data to the end of April 2017. We have already highlighted that overall mortgage stress is rising, with more than 767,000 households in stress compared with last month’s 669,000. This equates to 23.4% of households, up from 21.8% last month. 32,000 of these are in severe stress. We also estimate that nearly 52,000 households risk default in the next 12 months.

But now we look at individual post codes, and explore the top ten based on the number of households we expect to default. This is calculated using our 52,000 household sample with economic overlays for employment, inflation, interest rates and costs of living.

Note the labels in the chart above are only examples of locations within the postcodes.

As a general observation, many of the worst hit post codes are areas containing large numbers of newer property in the outer urban ring. Households here have large mortgages and limited income growth relative to house prices. But there are some important differences in terms of recent house price movements across the post codes.

We will count down the top 10, from 10th down to the highest risk postcode. So stay with us to the end!

The tenth highest risk post code in Australia is 6027 in Western Australia. This is the city of Joondalup and includes places like Ocean Reef and Edgewater. It is about 25 kilometres north of Perth. It’s a fast growing area with lots of young families, lots of new homes and large mortgages relative to income. The average house price is $510,000, down from $570,000 in 2014. We estimate there are more than 1,900 households in mortgage stress in the area, and 211 are likely to default in the next few months.

In ninth spot is Victorian post code 3064. This includes Craigieburn, Mickleham and Roxburgh Park. This area is about 25 kilometres north from Melbourne. The average house price is $438,000, up from $330,000 in 2014.  Again it is a fast growing area, with more than 60% of households holding a mortgage. The average age here is 30 years. We estimate there are 4,320 households in mortgage stress, and 212 are likely to default in the next few months.

Next at number eight is 4740 in Queensland. This includes Mackay and the surround areas, including Alexandra, Beaconsfield, Richmond and Slade Point. This area is more than 800 kilometres north of Brisbane, and is the gateway to the Bowen Basin coal mining reserves of Central Queensland. The average house price is $240,000 compared with $400,000 in 2014.  We estimate there are more than 3,600 households in mortgage stress in the region, and 244 are likely to default in the next few months.

We go back to Victoria for the seventh placed postcode which is 3029, Hoppers Crossing. This is a suburb of Melbourne about 23 kilometres’ south-west of the CBD and has grown to become a substantial residential area, with about half of properties there mortgaged. The average age is around 35. The average house price is $440,000 compared with $340,000 in 2014. We estimate there to be more than 3,400 households in mortgage stress, and we expect 266 households to default in the next few months.

In sixth place in Western Australia, is 6164, the city of Cockburn. It is about 8 kilometres south of Fremantle and about 24 kilometres south of Perth’s central business district. It includes areas like Jandakot, South Lake and Success. Around 40% of homes in the region are mortgaged and the average age is 31 years. Average house prices are around $730,000 about the same as in 2014. More than 2,530 households are in mortgage stress here, and the estimated number of defaults in the next few months is 308.

Next, counting down to number five, is another WA location, 6065, the city of Wanneroo which is around 25 kilometres north of Perth on the rail corridor. Again a fast growing suburb, the city has had the largest population expansion out of any other local government area in greater Perth. The average house price is $425,000 compared with $480,000 in 2014. Nearly half of households here have a mortgage, and more than 7,400 are in mortgage stress. We estimate that 339 households are likely to default in the next few months.

In fourth spot is Cranborne in Victoria, 3977. It is a suburb in the outer south east of Melbourne, 43 kilometres from the central business district. Its local government area is the City of Casey which is one of Victoria’s most populous regions, with a population of well over a quarter of a million. The average house price is $425,000 compared with $330,000 in 2014. In 3977, close to half of all homes are mortgaged, and we estimate 2,750 households are in mortgage stress, including 344 in severe stress. We estimate around 340 households will default in the next few months.

So down to the top three. The third most risky postcode according to our analysis is Victorian post code 3030 which is the region around Derrimut and Werribee. Werribee is a suburb of Geelong and is about 29 kilometres south west of Melbourne. The median house price is $405,000, well above its 2014 level of $310,000. Here 3,730 households are in mortgage stress, and 342 are likely to default in the next few months.

In second place is another Western Australian post code, 6155, Canning Vale and Willetton. It’s a large southern suburb of Perth, 20 kilometres from the CBD. The population has been growing quickly with significant new builds, and 60% of households have a mortgage. The average house price is around $560,000, down from $610,000 in 2014. The average age is 32 years. We estimate there are 4,150 households in mortgage stress and 342 households risk default in the next few months.

So finally, in top spot, at number one, is another Western Australian postcode 6210, Mandurah. This also includes suburbs such as Meadow Springs and Dudley Park. Mandurah is a southwest coast suburb, 65 kilometres from Perth. The average home price is around $300,000 and has fallen from $340,000 since 2014. Here there are 1,430 households in mortgage stress but we estimate 388 are at risk of default in the next few months.

As a final aside, in twenty second place, is the highest risk postcode in New South Wales, 2155, Kellyville, which is 36 kilometres north-west of the Sydney central business district in The Hills Shire. The average house price here is $1.1 million, compared with $860,000 in 2014. We estimate there are 1,240 households in mild stress and we estimate 151 households risk default in the next few months.

So that completes our analysis of the current most risky postcodes. We will update our modelling next month, so check back to see how the trends develop. But in summary households in Western Australia are most exposed in the current environment, especially with house prices there falling.

Mortgage Stress On The Radio

I had the chance to discuss our latest mortgage stress research with Jon Faine on ABC Radio Melbourne today.

The ABC also did an on-line segment based on the interview:

Almost 52,000 Australian households are at risk of defaulting on their mortgages in the next 12 months and a quarter of home owners are under home loan stress, a data analyst has said.

Key points:

  • Mortgage stress now spreading to more affluent areas, researcher says
  • Half of people under financial strain don’t have a budget, survey finds
  • WA, Victoria and Queensland leading the way on default risk

According to Digital Finance Analytics (DFA), 767,000 households were in mortgage stress in April, meaning they had little leeway in their finances, up from 669,000 the previous month.

Of those, it said 32,000 were in severe stress and unable to meet repayments with their current income.

It estimated almost 52,000 households were at risk of defaulting in the next year.

“It’s a concerning trend, and it’s a growing trend, and essentially there’s quite a smattering [of households under stress] across the country,” DFA’s principal Martin North told ABC Radio Melbourne.

    “What’s significant about the research is it isn’t just in the usual suspects, in other words the mortgage belt, the battling areas you might expect.

“We’re seeing households in all sorts of different areas now experiencing quite some difficulty in just managing their mortgage repayments.”

Traditionally well-off suburbs like Hornsby in Sydney, Brighton in Melbourne and Mount Claremont in Perth were also seeing high levels of stress.

The data was drawn from household surveys conducted by DFA, data from the Reserve Bank, the Australian Bureau of Statistics and APRA.

WA, Victoria lead the way on default risk

Of the 20 postcodes with the most risk of default, the majority fell in WA, followed by Victoria and Queensland.

Mr North said in New South Wales mortgage stress was spread out in a number of different areas, compared to Victoria’s, which was more concentrated in its booming growth suburbs.

Postcodes with high default risk:

  • WA – Mandurah, Wanneroo, Canning Vale, Beeliar
  • VIC – Derrimut, Point Cook, Werribee, Cranbourne, Craigieburn
  • QLD – Mackay, Carrara, Nerang, Hervey Bay, Toowoomba

    In those states, and around Brisbane, stress was related to flat incomes, big mortgages and rising costs of living exacerbated by investors.

    “While the economic indicators are reasonably good in Victoria, if you actually look at real incomes, they are actually not great. The cost of living is growing faster in Victoria than elsewhere,” he said.

In NSW, high home values have pushed up repayments. Mr North also highlighted high childcare costs as a particular problem.

“In WA, we’ve got prices falling significantly and unemployment rising. It’s pretty scary what’s happening there,” he said.

In some parts of Queensland it’s a similar story to the west. Home values, employment and incomes are falling in the resource-heavy areas like Mackay and the Bowen Basin.
What should you do if you’re in mortgage stress?

Mr North said there were a few things you could do if you were struggling, or to avoid getting into trouble.

Set out a clear budget so you know what you’re spending on
Prioritise what you spend money on
Go to the bank for help

“Only half the households we surveyed actually have a formal household budget, so they know what they’re spending and what they’re earning, and some people don’t want to look and some never bother,” he said.

“Make some choices about where to spend your money. Some people would say things like high-speed internet connectivity on your phone and all those sorts of things are really critical. But is it as critical as paying that mortgage?”

He said banks were obligated by law to help those struggling with their repayments.

    “Many people think it’ll be OK and just muddle on through, what I would say is if you’re in difficulty have a conversation with your bank and see what can be done,” he said.

“But many people muddle along for too long and get to a point where they have no choice but to sell.”

Big loans, flat wages driving financial troubles

Mr North said household debt in Australia was higher than ever before, combined with the growing cost of living.

“Prices have been rising significantly and people have been reaching for ever-larger mortgages to get into the market, so people have fundamentally bigger debts than previously,” he said.

“What we’re finding is things like childcare costs, school fees, rates, all those things have gone up a lot and then the fact that these larger mortgages, because prices have gone up, are being impacted by interest rate rises.

“Don’t underestimate the small, incremental interest rate rise translating into quite a big dollar-a-month increase when you’ve got a big mortgage.”

Mr North said the issues stemmed from the combination of underemployment and stagnant wages.

“In the early 2000s when we had very strong property price growth and mortgage growth we had very, very strong income growth to match, so essentially things worked OK,” he said.

“But this time around we’ve got a combination of very large mortgages, but income [is] static or falling in real terms and that’s the difference.

“What that means is this is not going to get worked out anytime soon, so all this talk about housing affordability and helping new people get into the market are missing the key point.

“These are people in the market now with their properties, dealing with these mortgages, dealing with the day-to-day issues of trying to manage their finances and it’s really tough.”

Wealthy feel pinch of housing costs as one in four Australians face mortgage stress

From The Guardian Australia.

The burden of housing costs is biting even in Australia’s wealthiest suburbs as an unprecedented one in four households nationally face mortgage stress, according to the latest in a 15-year series of analyses.

Households in Toorak and Bondi, prestigious pockets of affluence in Australia’s biggest cities, have made the list of those struggling to meet repayments amid rising costs and stagnating wages, research firm Digital Finance Analytics has found.

The firm’s principal, Martin North, said it was surprising new evidence showed that financial distress from property price surges reached beyond “the battlers and the mortgage belt” and was a “much broader and much more significant problem”.

The survey, which analyses real cash flows against mortgage repayments, finds more than 767,000 households or 23.4% are now in mortgage stress, which means they have little or no spare cash after covering costs.

This includes 32,000 that are in severe stress, meaning they cannot cover repayments from current income.

The firm predicts that almost 52,000 households will probably default on mortgages over the next year. Risk hotspots include Meadow Springs and Canning Vale in Western Australia, Derrimut and Cranbourne in Victoria, and Mackay and Pacific Pines in Queensland.

Overall, New South Wales and Victoria, whose capital cities have seen a recent surge in home prices, accounted for more than half the probable defaults (270,000) and households in mortgage distress (420,000).

North said the numbers were “an early indicator of risk in the system”.

The underlying drivers were “flat or falling wage growth”, much faster rising living costs and the likelihood mortgage interest payments would only go up.

Widespread mortgage burdens were limiting spending elsewhere and “sucking the life out of the economy”, and the problem should be addressed to head off a housing crash and its repercussions, North said.

“If we start seeing house prices slipping then this can turn into a US 2007 scenario rather quickly,” he said.

North is not alone in highlighting household vulnerability. The Reserve Bank of Australia’s financial stability review last month observed one-third of Australian borrowers had little or no mortgage “buffer”, which North said was “the first time they’ve ever admitted it”.

Finder.com last week found 57% of mortgagees could not handle a rise of $100 or more in monthly repayments.

“The surprising thing is that people in Bondi in NSW, for example, or even young affluents who have bought down in Toorak in Victoria are actually on the list [of mortgage stressed],” North said.

“The reason is they’ve bought significantly large mortgages to buy a unit, modified or brand new.

“They’ve got bigger incomes than average but essentially they are highly leveraged so they have little wiggle room and of course any incremental rate rise, because they’ve got such big mortgages, slugs them pretty heavily.”

Semi-retirees who moved to central coast NSW but are still exposed to large mortgages while their incomes were falling away were another atypical snapshot of those in financial distress, North said.

“And the people at the top, the most affluent households, the ones who’ve got really big properties, have the lifestyles to match. So again, their spare cash is not huge.

“And that point – it isn’t just the mortgage belt, it isn’t just the typical battlers who are actually exposed here – shows is a much broader, more significant problem.”

Brokers have ‘important role to play’ for stressed households

From The Adviser.

Mortgage brokers have an important role to play for the increasing number of households experiencing mortgage stress, as they are a “very good source of advice” according to a market analyst.

Around 52,000 households are now at risk of default in the next 12 months, according to mortgage stress and default modelling from Digital Finance Analytics for the month of April.

The modelling revealed that across the nation, more than 767,000 households are now in mortgage stress (669,000 in March) with 32,000 of those in ‘severe’ stress. Overall, this equates to 23.4 per cent of households, up from 21.8 per cent on the prior month.

Speaking to Mortgage Business, Digital Finance Analytics principal Martin North remarked that mortgage brokers have a role to play for stressed households in terms of helping them “find their way through the maze”.

“Maybe that’s a restructure, maybe it’s a different type of loan… I think [brokers] are a very good source of advice for households and for people who come and seek guidance [for example] refinancing may help,” Mr North said.

In saying this, Mr North noted that when it comes to identifying an appropriate loan for customers, brokers should remain “conservative” in their estimation of what households can afford.

“Don’t encourage households to borrow as big as they can. That 2 to 3 per cent buffer is really important, and those spending and affordability calculations are really important.

“There’s an obligation both on brokers and on lenders to do due diligence on borrowers to make sure that they’re not buying unsuitably, and that includes detailed analysis of household expenditure.

“My observation is that some of those calculations don’t necessarily get to the real richness of where households are at, so I think that all those operating in the market need to be aware of the fact that how we look at spending becomes really important on mortgage assessments.”

Mr North added that brokers should operate on the assumption that rates and the cost of living will continue to rise, while incomes remain static.

“So, don’t try and flog that bigger mortgage,” he recommended. “I would say be conservative in your advice and the structure of the conversation you have.”

The latest results of Digital Finance Analytics’ mortgage stress and default modelling are “not all that surprising”, Mr North said, considering that incomes are static or falling, mortgage rates are rising, and the cost of living remains “very significant” for many households.

“All those things together mean that we’ve got a bit of a perfect storm in terms of creating a problem for many households,” he said, adding that for many households, any further rises in mortgage rates or the cost of living would be sufficient to move them from ‘mild’ to ‘severe’ stress.

“It doesn’t take much to tip people over the edge. It takes about 18 months to two years between people getting into financial difficulty and ultimately having to refinance or sell their property or do something to alleviate it dramatically, so I think we’re in that transition period at the moment as rates rise… over the next 12 to 18 months my expectation is that we would see mortgage stress and defaults both on the up.”

According to Mr North, Digital Finance Analytics’ data uses a core market model, which combines information from its 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 2017.

The market analyst examines household cash flow based on real incomes, outgoings and mortgage repayments. Households are “stressed” when income does not cover ongoing costs, rather than identifying a set proportion of income, (such as 30 per cent) directed to a mortgage.

What The Mortgage Stress Data Tells Us

Following the initial release yesterday, and the coverage in the AFR, today we drill down further into the latest mortgage stress results.

By way of background, we have been tracking stress for years, and in 2014 we set out the approach we use. Other than increasing the sample, and getting more granular on household finance, the method remains the same, and consistent. We can plot the movement of stress over time.

Remember that the recent RBA Financial Stability review revealed that 30% of households were under pressure with no mortgage buffer, and a recent Finder.com.au piece suggested more than 50% were unable to cope with a $100 a month rise. So we are not alone in suggesting households are under greater financial pressure.

For this analysis we plot the number of households in mild stress (making mortgage repayments on time but tightening their belts so to do); severe stress (insufficient cash flow to pay the mortgage), and also an estimation of the number of households who may hit a 30-day default within the next 12 months. This is calculated by adding in a range of economic overlays into the stress data. This is all done in our core market model, which contains data from our rolling surveys, private data from lenders and other sources, and public data from the RBA, APRA and ABS.  This model is unique in the Australian context because it runs at a post code and household segment level, allowing us to drill into the detail. This is important because averaging masks significant variations.

The analysis shows that there are more severely stressed households in NSW than other states, and that around 13,000 households risk default in the next year, a similar number to VIC. WA is third on this list, with the number of defaults lower elsewhere.

Another lens is by the locations of households, in the residential zones around our major cities. The highest risk of default resides in the our suburbs, where a higher proportion of households are in severe stress. Households in inner regional Australia are next, followed by the inner suburbs, where again more households are in severe stress.

Our core household segmentation shows that the highest count of defaults are likely among the suburban mainstream, then the disadvantaged fringe, followed by mature stable families and young growing families. It is also worth noting that the young affluent and exclusive professional, the two most affluent segments contain a number of severe stressed households. This have larger mortgages and lifestyles, but not necessarily more available cash.

Finally, for today, here is the mapping across the regions. No surprise that the largest number of stressed households are in the main urban centres of  Melbourne and Sydney.

Next time we will look at post codes across the country.

 

Mortgage Stress And Default Probability Rise Again In April

Digital Finance Analytics has released new mortgage stress and default modelling for Australian mortgage borrowers, to end April 2017.  Across the nation, more than 767,000 households are now in mortgage stress (last month 669,000) with 32,000 of these in severe stress. This equates to 23.4% of households, up from 21.8% last month. We also estimate that nearly 52,000 households risk default in the next 12 months.

This analysis uses our 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 April 2017.

We analyse household cash flow based on real incomes, outgoings and mortgage repayments. Households are “stressed” when income does not cover ongoing costs, rather than identifying a set proportion of income, (such as 30%) going on the mortgage.

Those 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 said “Mortgage stress continues to rise as households experience rising living costs, higher mortgage rates and flat incomes. Risk of default is rising in areas of the country where underemployment, and unemployment are also rising. Expected future mortgage rate rises will add further pressure on households”.

“Stressed households are less likely to spend at the shops, which acts as a drag anchor on future growth. The number of households impacted are economically significant, especially as household debt continues to climb to new record levels. The latest housing debt to income ratio is at a record 188.7* so households will remain under pressure.”

“Analysis across our household segments highlights that stress is touching more affluent groups as well as those in traditional mortgage belts”.

Regional analysis shows that NSW has 211,000 households in stress, VIC 209,000, QLD 139,000 and WA 109,000. The probability of default has also risen, with more than 10,000 in WA, 10,000 in QLD, 13,000 in VIC and 14,000 in NSW. Probability of default extends the mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes.

We will look at the data in more detail over the next few days and then drill down to some of the worst hit post codes.

*RBA E2 Household Finances – Selected Ratios Dec 2016.

Record numbers under mortgage stress

From The Australian Financial Review.

Record numbers of Australian households face mortgage stress as large loans and rising interest rates start to bite, according to detailed analysis of lending, repayments and household incomes.

Affluent suburban postcodes feature among an estimated 1000 households a week expected to face mortgage default over the next 12 months, the analysis reveals.

“Debt stress momentum is unprecedented,” according to Martin North, principal of research firm Digital Finance Analytics, who has been doing the survey for more than 15 years.

“This is not just about mortgage battlers. It is also hitting the households with bigger incomes and more leverage. It is worrisome,” Mr North said. Numbers of borrowers in severe distress has increased by about one-third to about 32,000 in the past 12 months, he said.

Concern that 767,000 households – or one-in-four across the nation – are facing financial distress follows last month’s warning by the Reserve Bank of Australia about increasing family “vulnerability” caused by soaring property prices, particularly in Melbourne and Sydney.

Reserve Bank assistant governor Michele Bullock said regulators may be forced to impose even heavier restraints on lenders to prevent the property market becoming the trigger for a disruptive financial crisis, said Reserve Bank assistant governor Michele Bullock.

Ms Bullock conceded that the effect of so-called macroprudential regulations imposed on the banks in 2015 to curb investor lending may be fading.

It also follows the Australian Securities and Investments Commission discovery that about 1.5 million recent loan applications matched minimum financial requirements, triggering concerns about lax lending standards.

Other prudential regulators are warning about the need to control interest-only lending because of concerns borrowers’ lack strategies for repaying principals, increasing vulnerability to financial stresses.

Digital Finance Analytics’ report is based on information from 52,000 household surveys and public data from the Reserve Bank of Australia, Australian Bureau of Statistics, Australian Prudential Regulation Authority and information from lenders and aggregators, which are companies that act as intermediaries between mortgage brokers and lenders.

Households are “stressed” when income does not cover ongoing costs, rather than identifying a percentage of income committed to mortgage repayments, such as 30 per cent of after-tax income.

Those in “severe distress” are unable to meet repayments from current income, which means they have to cut back on spending or rely on credit, refinancing, loan restructuring or selling their house.

Mortgage holders under “severe distress” are more likely to seeking hardship assistance and are often forced to sell.

“Stressed households are less likely to spend, which acts as a drag anchor on future economic growth,” said Mr North. “The number of households impacted are economically significant, especially as household debt continues to climb to new record levels.”

However lenders would be expected able to ride out a spike in arrears because they can foreclose on properties whose value has been inflated by unprecedented price growth.

State government budgets in the nation’s most populous states and territories have been boosted significantly by stamp duty charged on property transactions.

About 32,000 households are in severe distress, the analysis reveals. An additional 10,500 households in the suburban mainstream are in risk of default.

Other vulnerable community segments at risk of default include young growing families, the highly leveraged young ‘affluent’.

Most lenders are increasing rates for investors and toughening lending terms and conditions by increasing deposits and demanding more evidence that loans can be comfortably serviced by borrowers.

Commonwealth Bank of Australia, Westpac, National Australia Bank and Australian and New Zealand Banking Group have all raised investor rates in recent weeks.

Lenders are describing their strategy of slugging interest-only investors and easing pressure on principal and interest borrowers as the “new normal” because it differentiates between classes of borrowers as directed by regulators.

Housing affordability is worsening, warns ratings agency

From Mortgage Professional Australia.

Moody’s report shows regulatory crackdowns and low-interest rates will not protect affordability, putting pressure on Government to take action in the Budget

Housing affordability is deteriorating in Australia despite the impact of regulatory crackdowns and low interest rates, a report by international ratings agency Moody investors Service has found.

Affordability worsened in the year to March 2017, with interest repayments requiring for 27.9% of household income on average, compared with 27.6% in March 2016. Affordability declined steeply in Sydney, Melbourne and Adelaide, according to the report, although it improved in Brisbane and Perth, which is currently the most affordable city in Australia, with the proportion of income going to repayments at 19.9%.

Moody’s expect that housing affordability will continue to deteriorate, blaming “rising housing prices, which outstripped the positive effects of lower interest rates and moderate income growth”. Whilst APRA’s restrictions on interest-only mortgage lending could dampen demand for apartments they could also reduce affordability, Moody’s claims: “the new regulatory measures have prompted some lenders to raise interest rates on interest-only and housing investment loans, which will make such loans less affordable.”

Proportion of joint-income required to meet interest repayments, March 2016:

  • Sydney 37.5%
  • Melbourne 30.3%
  • Brisbane 23.9%
  • Adelaide 23%
  • Perth 19.9%
  • Australia: 27.9%

Coming just weeks ahead of the 2017-18 Federal Budget, Moody’s report indicates the Government cannot rely on regulators and the RBA if it wants to improve affordability. In March Treasurer Scott Morrison said repayment affordability would play a major part in the Budget and was a bigger issue then the difficulty of first home buyers, whilst ruling out any changes to negative gearing.

In a series of sensitivity tests, Moody’s demonstrated the risks faced by Australian homeowners. Looking at the effect of house prices continuing to rise, income decreasing and interest rates increasing, Moody’s found Sydney homeowners were particularly vulnerable. A 10% rise in property values – far from unknown in the harbour city – meant an extra 3.8% of income needed to meet mortgage repayments.

Moody’s report did find that affordability was unchanged for apartments. Apartment owners spent an average of 24.5% of their income on repayments, compared to 29.3% for house owners. This is a national average: affordability of apartments did decline in Sydney and Melbourne.

It’s Not Just Low Income Households In Mortgage Stress

So the banking analysts are lining up to talk about the risks in the housing market, and the potential impact on bank earnings. But the latest line being peddled is that the major risks are located among low income – small mortgage – urban fringe – households.

But this is just not true. Our household surveys, probably the most accurate and current view of households financial footprints, tell a different story. We have already explored this from a segmented perspective, and highlighted that affluent households are also exposed – they have the big incomes and life-styles, but also the mortgages to match.

Here is a different view, mapping income bands to loan to income (LTI) bands. LTI is relevant because traditionally a ratio of much above 3 times begins to look more risky, especially in a low income growth environment.

First we look at the relative distribution by count of loans. This visualisation shows that around 55% of loans are sitting in the 3 times or below LTI range, and 68% of the loans are sitting in the household income bands  below 100k. But this is deceptive.

An alternative and more concerning view is based on the value of loans outstanding. This next visualisation shows that by value the loans spread up the income bands, but also spread across the loan to income bands. In fact only 28% of loans by value sit at LTI’s below 3 times and 34% sit with household incomes of $100k or below.

So, once you take the relative size of loans into account, mortgage stress breaks the boundaries of “low income, small mortgage” households. The problem is much more deep seated, and more affluent households are some of the most leveraged, to the point where small rate rises will hurt, especially where they have both owner occupied and investment mortgages.  They are also less likely to know how to respond, whereas the battlers are use to sailing close to the wind in terms of managing a household budget.