Mortgage Stress – Page 28 – Digital Finance Analytics (DFA) Blog

How Households Will Respond To Interest Rate Rises

We have updated our analysis of how sensitive households with an owner occupied mortgage are to an interest rate rise, using data from our household surveys. This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards.

To complete this analysis we examine how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. We then run scenarios across the data, until they trip the mortgage stress threshold.

At this level, they will be in difficulty. The chart shows the relative distribution of borrowing households, by number. So, around 20% would have difficulty with even a rise of less than 0.5%, whilst an additional 4% would be troubled by a rise between 0.5% and 1%, and so on. Around 35% could cope with even a full 7% rise.

If we overlay our household segments, we find that young growing families and young affluent households are most exposed to a small rate rise. However, some in other segments are also at risk.

State analysis highlights that households in NSW are most sensitive, a combination of larger volumes of loans as well a larger loans, relative to incomes resulting is less headroom.

Younger households are relatively more exposed, because their incomes tend to be more limited and are not growing in real terms relative to mortgage repayments.

Analysis by DFA property segment shows that whilst some first time buyers are exposed at low rate movements, those holding a mortgage with no plans to change their properties (holders) are also exposed. In addition, some seeking to refinance are doing so in the hope of reducing payments, because they have limited headroom.

Finally we turn to other insights from our data. First, those households who sourced their mortgage via a mortgage broker are more likely to be in difficulty with a small rate rise, compared with those who went direct to a bank. This, once again, shows third party loans are more risky. This perhaps is connected to the types of people using brokers, as well as the broker’s ability to suggest lenders with more generous underwriting standards and coaching on how to apply successfully.

We also see that rate seekers (we call these soloists) who are driven primarily by best rates, are more sensitive to small rate rises, compared with those who are more inclined to seek advice, and appreciate service more than price (we call these delegators).

Soloists who went via a broker are the most exposed should rates rise even a little, whereas delegators going to a bank, are more able to handle future rises.

Segmentation, effectively applied can results in quite different portfolio outcomes!

The Full 100 Mortgage Stress Listing

To complete our series on mortgage stress, based on our household surveys, here is the complete list of the top 100 most stressed suburbs, and their relative position on the default list, as at December 2016.

Victoria has the highest number of suburbs in the listing.

As we discussed yesterday, this is based on the absolute number of households in the suburb who are in difficulty. You can also watch our video blog where we discuss the research.

Running our risk models, we expect the banks to be reporting higher mortgage defaults next year, with a lift in write-offs from around 2 basis points, to 4 basis points. However, this is still at a low, and manageable level given the capital buffers they hold. We do expect provisions though to rise.

Fears rise as mortgage stress strikes bush, city

From The Australian.

In Lamington, a country area of Western Australia covering mining towns such as Kalgoorlie, 2600 households are suffering “mortgage stress”.

The pain is more severe in Harristown in Queensland, about 130km west of Brisbane, where more than 4500 households are in difficulty.

For the banks, more than 370 in these areas alone are likely to default, or fall more than 30 days behind on repayments, according to data from Digital Finance Analytics.

Research covering the top 20 postcodes with the greatest mortgage stress features many country areas but Melbourne’s Essendon and Preston each have around 2500 households in difficulty, as does western Sydney’s Bossley Park.

Despite record low interest rates and unemployment below 6 per cent, Standard & Poor’s yesterday said arrears ticked higher in October and the proportion of “non-conforming” borrowers behind on payments was near record levels.

DFA’s data, based on a rolling survey of 2000 households a month, suggests the trend will worsen. It also suggests first time home buyers who received help from the “bank of mum and dad” were more likely to default.

“The issue will be what happens to interest rates. If interest rates don’t go up, then some of this won’t flow through, but I think all the expectations are that interest rates will rise,” said DFA analyst Martin North, who is factoring in a 50 basis point increase in rates next year.

Banks in recent weeks have hiked mortgage rates for many customers out of sync with any RBA changes, which analysts said could put customers under greater pressure amid meagre income growth.

Mr North said: “My own models predict a higher rate of loss than they (banks) are currently predicting themselves.”

The RBA yesterday signalled borrowers were unlikely to win any imminent reprieve on their debt repayments early next year.

After cutting rates since late 2011, the RBA’s minutes of its monthly board meeting revealed greater concern about the “balance” between low rates supporting economic growth and the “potential risks to household balance sheets”.

“Members recognised that this balance would need to be kept under review,” the RBA said.

Westpac chief economist Bill Evans said the RBA was concerned the benefits to spending from lower rates were not compensating for the instability in asset markets, heightened by record high household debt.

“This observation is signalling that the hurdle to even lower rates which would be aimed at boosting demand is very high,” he said. As house prices soared more than 65 per cent in Sydney in the past four years while floundering in other areas, some hedge funds and analysts have flagged overgeared households and a sagging real economy were increasing the risks of a housing correction.

US-based asset manager AllianceBernstein yesterday warned that potential “disorder” in the housing sector in the second half of next year clouded the outlook for Australia’s investment markets. Former Commonwealth Bank chief David Murray this month said all the signs of a housing “bubble” were prevalent, such as “people’s behaviour … and defensiveness about any correction”.

Mr Murray told Sky Business that investors owning multiple properties that were cross-collateralised who could become forced sellers were the “risk to the system”. But the big banks have repeatedly tried to ease fears about the risks, citing relatively low unemployment and most customers being ahead on their loan repayments.

Westpac last month reported actual mortgage losses after insurance eased to $31 million, or just 2 basis points of its loan book. The number of consumer properties in possession rose to 262, from 253 in March.

ANZ and Bank of Queensland, however, recently flagged concerns about stagnant wages, underemployment and the apartment glut in eastern cities.

According to DFA’s survey, around 80 per cent of households were travelling well and only 20 per cent were under stress, struggling to make repayments or having to cut back on spending.

Mr North said low wages growth and rising education and healthcare costs suggested borrowers’ financial situations would not improve. He predicted the banking industry’s loss rates would rise to about 4 basis points of mortgage loans, varying among lenders’ portfolios.

He said banks concentrated in troubled areas, such as WA, would be harder hit.

After the pick-up in bank stock prices since last month, CLSA analysts yesterday reminded investors that all were at risk of favourable loan-loss trends of recent years reversing and that CBA was more exposed than peers to WA.

WA has the largest proportion of stressed households at 26.4 per cent, just ahead of Victoria, but off a smaller population base, according to DFA’s survey.

Mr North said: “I’m theorising there is more risk in the mortgage book than I think the RBA recognises and more risk than some of the risk models used by the banks. It’s not dramatic … I’m not saying the world is caving in. 80 per cent of the book is fine.

“But it’s enough to at least be aware of.”

New DFA Video Blog – Household Mortgage Stress and Defaults

Using data from our household surveys in this new video blog we discuss the findings from our latest modelling. More than 22% of households are currently in mortgage stress, and 1.9% of households are likely to default. Both are likely to rise next year.

A Segmented View Of Mortgage Stress and Default

As we continue our series on mortgage stress, using the latest data from our surveys, we look at how stress aligns with our core household and property owning segments.

To set the context for this, here are a couple of charts showing the mortgage distribution by income and age bands. The majority of mortgages are held by households with an income of between $50,000 and $150,000.

Mortgage stress and default are slightly higher across the lower income bands, but note that households with substantially higher incomes can also be in severe stress. But of course the absolute number are very small.

The highest proportion of mortgages are held by those aged 30-39, more than 30%.

Default probability is higher among younger and older households. Whilst the number of these households with a mortgage is relatively low, more are in severe mortgage stress because their incomes are much lower. More generally, some mortgage stress is evident across all age bands. In volume terms, the highest stress volumes are found in those 30-39 years.

Next we turn to our property segmentation. Those holding property account for the largest segment of the market. You can read about our segmentation approach here.

Probability of default is highest among first time buyers, who also have the highest proportion of severe mortgage stress. The segment with the lower risk and levels of stress are those seeking to trade up.

On interesting finding, bearing in mind we highlighted the rise of first time buyers seeking help from “The Bank of Mum and Dad“, is that those who do get help are more likely to default. So, assistance from parents may be a two-edged sword.

Finally, we turn to our master segmentation. The number of households with a mortgage varies across these segments. The value distribution footprint is quite different, with the exclusive professional and young affluent segments holding the larger average mortgage.

Mortgage stress is highest among the disadvantaged fringe, though their mortgages are relatively lower and default rates are relatively low. Wealthy seniors registered high levels of severe mortgage stress, thanks to pressure on incomes (the impact of low returns from bank deposits and rentals are important here).

However, the highest risk of defaults sits with the younger segments. Young affluent households, with large mortgages are most exposed because their incomes are flat whilst they are highly leveraged, so as interest rates rise, they are exposed. Many have bought new high-rise apartments in the inner city areas.

Young growing families may have, on average smaller mortgages, but their finances are tight, with little room to maneuver, and any rise in interest rates will be a problem for them. Costs are living are moving higher for this group, especially child care costs.

So, we think effective segmentation is critical to understand the various portfolio risks which reside in the bank’s mortgage book. We need to move beyond LVR and LTI.

Next time we will look at some of the post code level data.

Mortgage Stress And Probability Of Default Is Rising

We have just finished the December update of our mortgage stress and probability of default modelling for the Australian mortgage market.

Our model has been updated to take account of the latest employment, wage, interest rate and growth data, and we look are the current distribution of mortgage stress (can households settle their mortgage repayments, on time without financial pressure?) and make an estimate of the probability of households defaulting on their repayments by more than 30 days. The former uses our survey data on mortgages held, interest rates applied, and income available in the light of other financial commitments. Probability of default overlays the broader economic drivers. The base analysis is completed at a customer segment level by post code then rolled up to form various data views. In the next few days, we will discuss the findings in some detail. You can read more about our approach here. We also also reveal the current top 100 post codes for mortgage stress and mortgage defaults across the nation.

To begin, here is a summary by states, split down by CBD and rest of state.

The highest probability of default can be found in regional WA, thanks to pressure in the mining belt. 30 days defaults will be close to 4%. Here, around 25% of households are in mortgage stress, including some in severe stress – see our descriptions here.

Default expectations are also high in and around Perth, where employment prospects are faltering, and incomes under pressure. In QLD, away from Brisbane, we see similar issues. The ACT has the lowest level of default probability.

The highest levels of mortgage stress are found in Tasmania, and across Regional NT, where more than 30% of households are under pressure. We also see hot spots in regional areas.

Of note is the high proportion of households in greater Sydney in severe mortgage stress – at 6.2% of borrowing households. This is a function of large mortgages (driven by high prices), rising interest rates AND flat incomes. By way of comparison, Melbourne households in severe stress sit at 3.3%, as mortgages are a little smaller. They are both higher than the national average of 2.8% of households.

Combined, across the country, more than 22% of all households are now in some degree of mortgage stress.

Next time we will dig into the more specific geographic footprints, because you really have to get granular to make sense of what is going on. Averages across the national simply mask what is going on. Later will will look at loan-to-income and debt servicing ratios which are also deteriorating for many. Then finally we will look at the loss implications for the banking sector.

The Top 10 Mortgage Stress Post Codes In The Hobart Region

We finish our series on mortgage stress by looking at TAS, and the region around Hobart. Using data from our surveys, 24.3% of households are currently in mortgage stress. This is above the national average of 21.3%. You can read about our methodology here. We assess individual household income and expenditure, and do not rely on a simplistic “35% of income rule of thumb” used by many others.

Here is the mapping around Hobart, showing the relative count of households in stress.

Looking at the top 10 in TAS, Riverside 7250 contains the largest number in stress.

Riverside is a suburb of Tasmania, about 164 kms from Hobart to the north west. The average age of the people in Riverside is 40 years of age and the average income $1,110. The average mortgage is below $100,000.

Next is Kingston, (7050), a suburb of Tasmania about 11 kms from Hobart. The average age of the people in Kingston is 36 years of age and the average income is $1,110 whilst the average mortgage is $130,000.

The third highest is Dynnyrne, just 2 kms from central Hobart. The population is younger and more wealthy than the other post codes, with an average income of $1,380. The average mortgage is $409,000.

So, once again we see a wide range of households in stress.

That completes our series on mortgage stress in Australia in 2016. Our next piece of work will be to update our probability of mortgage default. Whilst this is connected to mortgage stress, the default modelling takes account of a range of broader economic indicators.

The Top 10 Mortgage Stress Post Codes In The Perth Region

We continue our series on mortgage stress by looking at WA, and with a focus on the Perth region. Using data from our surveys, 22.5% of households are currently in mortgage stress. This is above the national average of 21.3%. You can read about our methodology here. We assess individual household income and expenditure, and do not rely on a simplistic “35% of income rule of thumb” used by many others.

Here is the mapping around Perth, showing the relative count of households in stress.

Here is the top 10 list from WA.

6430, is in the mining belt of WA and includes Binduli, Broadwood, Hannans, Kalgoorlie, Karlkurla, Lamington, Mullingar, Piccadilly, Somerville, South Kalgoorlie, West Kalgoorlie, West Lamington, Williamstown, and Yilkari. It is in the federal electorate of O’Connor. The average age is just over 30 years. Average mortgage is $279,400.

Next on the list is Tapping (6065), a northern suburb of Perth about 27 kms from the CBD. The average age is 31. The area includes many recent migrants and the average mortgage is $170,610. A large proportion of purchasers are first time buyers.

Third is Wembley Downs (6019). Wembley Downs (6019) is a suburb of Perth on the coastal strip, about 9 kms from Perth. Average age is 40, and average weekly household income is $1,850. Here the average mortgage is $502,000.

Finally, Samson (6163) is a suburb about 14 kms south of Perth in the federal electorate of Fremantle. Average age is 45 years, average weekly household income $1,410 and average mortgage is $301,100.

Once again we see a diverse spread of households in mortgage stress.

The Top 10 Mortgage Stress Post Codes In The Melbourne Region

We continue our series on mortgage stress by looking at VIC, and with a focus on the Melbourne region. Using data from our surveys, 23.7% of households are currently in mortgage stress. This is above the national average of 21.3%. You can read about our methodology here. We assess individual household income and expenditure, and do not rely on a simplistic “35% of income rule of thumb” used by many others.

Here is the mapping around Melbourne, showing the relative count of households in stress.

Here is the list of the top 10 in the state. Berwick is a suburb 41 kilometres south-east of Melbourne’s central business district and has the highest count. Young growing families are the most strongly represented household segment, and they are under financial pressure thanks to costs of living, including child care. They have an average mortgage of $370,000, on relatively constrained incomes. The current median household income is $1,580 per week.

The next postcode, Essendon, is a suburb 10 km north-west of Melbourne’s central business district. Although a mixed community, young growing families are again under mortgage stress. Mortgages here, on average are larger, typically more than $600,000. the current median household income is $1,600 per week.

The third most stressed postcode is Narre Warren South, 40 km south-east of Melbourne’s central business district. This suburb has been expanding fast in the past decade, including many subdivisions. We classify households here as on the urban fringe and the average mortgage is $285,000. The current median household income is $1,330 per week.

We have gone into some detail here to illustrate that mortgage stress is multi-faceted, and the characteristics of households in stress varies considerably across postcodes.

Next time we look at Perth, and WA more broadly.

Tag: Mortgage Stress