Mortgage Stress – Page 29 – Digital Finance Analytics (DFA) Blog

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.

The Top 10 Mortgage Stress Post Codes In The Adelaide Region

As we continue our analysis of mortgage stress, using data from our household surveys, today we look at South Australia. With 24% of households in mortgage stress across the state, this is one of the higher proportions in the country currently; thanks to limp income growth, higher unemployment and lower absolute income levels. Home prices have not move up so much, but then, the price to income and loan to income ratios are no less extreme than in other states.

Here is the map centred on Adelaide, showing the relative number of households we asses as being in mortgage stress.

Here is a list of the top 10 across the state. The highest concentration is in Paralowie, a suburb in the north of Adelaide, South Australia. It is predominantly a residential suburb. Many of the properties are valued in the range of 250-350k. We have this classified in our outer suburban zone, and the households are predominately battling urban. Next is Woodville West, another suburb of Adelaide, situated about 9 kilometers northwest of the Central Business District. It lies within the City of Charles Sturt. We classify this post code as urban fringe and the stressed household segment is mainly battling urban.

Next time we look at VIC.

The Top 10 Mortgage Stress Post Codes In The Brisbane Region

As we continue our series on mortgage stress, today we look in and around Brisbane. This includes the post code with the highest stress count across all Australia. Refer to our earlier posts for the definitions we use.

Here is the geomapping in and around Brisbane showing the relative number of households in stress by post code.

Here is a list of the top 10 across QLD. Depending on the location, the predominate segment varies quite considerably. Harristown, 4350 a suburb of Toowoomba is located to the southwest of the city centre and has the highest count of stressed households across Australia.

Many households have had little or no income growth, are having to cope with large mortgages, and some more affluent segments are finding rental stream growth from investment properties fading.

Next time we will cover postcodes in SA, then VIC and WA.

The Top 10 Mortgage Stress Post Codes In The Sydney Region

Continuing our series covering the latest Digital Finance Analytics mortgage stress analysis, today we look at the Sydney region. Despite low interest rates, many households are in mortgage stress. Here is a map showing the number of households we assess as being in mortgage stress by post code. There are more households in western Sydney in difficulty.

Here is the list of the top 10 post codes. The post code with the largest number of households in mortgage stress currently is 2650, Turvey Park. Of note is the household segment most represented here – namely mature, older households. In fact as you go down the top ten list, the striking observation is that various segments are represented, including young families, battlers, and older households.

When we examine the drivers of stress, three elements are working in combination to create the issues, despite ultra low interest rates. These households have high levels of debt, relative to income (large mortgages and credit card debt); their incomes are static or falling in real terms and child care costs are high, and increasing, compounding the high costs of living. We also note that a disproportionate number of households have loans dating from 2012-13, when lending criteria were more generous, and as a result, they have higher than average loan to value and loan to income ratios. Many would fail now to get the loan they have, based on current criteria and some are finding refinancing to cheaper loans difficult.

Next time we will look at Brisbane.

Mortgage Stress – It’s All About Granularity

We have updated the Digital Finance Analytics Mortgage Stress Analysis, to August 2016, using data from our household surveys. Contrary to what might be thought, whilst the ultra-low mortgage rates are easing the finances of some households, mortgage stress still exists, and it’s iron hand is being felt by more than 21% of households. But it is not equally spread across the population, so you need to get granular to see what is going on. Worth though noting the Roy Morgan data we reported already, estimated 18.4% of households were in mortgage stress, so some correlation.

Over the next few days we will drill into the details to highlight where the pain is most severe, but today we start with an overview.

Before we start, we define mortgage stress, not as a fixed percentage of income servicing the mortgage, rather we examine the household budget, comparing the income with outgoings, including mortgage repayments and other commitments. Those in mortgage stress do not have sufficient free funds to pay their mortgage on time, without difficulty. You can read more about our definitions of mortgage stress here.

Looking at the summary analysis, the largest proportion of households who are borrowing and in mortgage stress reside in TAS and SA, then VIC, WA; all above the national average. QLD and NSW are below the average, along with NT.

In total there were 769,592 households nationally in stress. Looking at the number of households in stress by state however, NSW has the largest number with 244,119.

Turning to our household segments, those in the disadvantaged fringe and young growing family groups are the most strongly represented.

But, expressed as a percentage of segments in stress, young growing families are most exposed, with 41% in mortgage stress, slightly ahead of battling urban 36.7% and disadvantaged fringe 36%. Young affluent, stressed seniors and wealthy seniors were the least stressed.

Finally, here is the top 30 or so, nationally. The most stressed post code in Australia at the moment is 4350, Harristown, with more than 7,000 households in difficulty. Note too that those at the top of the list are not necessarily as expected. Some older and more affluent segments are also being hit.

Next time we will look in more detail at some of the states, and discuss the underlying causes of mortgage stress. But for now, it is clear that mortgage stress is still a very significant economic factor.

Not on struggle street yet, but mortgage stress risk is rising

From The Conversation.

Newly released analysis from Roy Morgan reaffirms that it is the lowest-income households that face the highest mortgage stress. And, contrary to what many might expect, the worst stress is not in Sydney and Melbourne, where property prices have hit record highs.

The Roy Morgan report estimates that 18.4% of Australian households are experiencing mortgage stress, a situation where over one-third of their income goes towards servicing a home loan.

Mortgage stress can lead to many complex social issues. It is considered one of the underlying causes of the Global Financial Crisis.

For many households affected by mortgage stress, defaulting is the last resort. Yet, as the mortgage-servicing pressure increases, so does mortgage risk.

Mortgage risk, the chance of a borrower defaulting, has increased to 83.2% for households earning under $60,000 per year. It is, however, virtually non-existent for households earning more than $150,000.

Income is more important than interest rates

The Roy Morgan report highlights the importance of income, more so than house prices and borrowing costs, to mortgage stress. In fact, interest rates would need to more than double to match the impact of a loss of income on housing stress.

The previous peak in mortgage stress was in 2008-09, a period of high interest rates and bubble-like price growth in Sydney and Melbourne.

This time around, record low interest rates appear on the surface to be counter-balancing the default rate. Yet this is tied to a stagnation in income levels.

House prices and income levels moved in step until 2013. While house prices have continued to increase, household income levels have flattened since then, when the cash rate dropped to a historic low of 2.75%. The cash rate is now even lower at 1.50%, with further cuts forecast.

The troubling prediction from this is that mortgage stress among Australian households is set to remain high, despite the current low interest rates.

Widening inequality

As home ownership concentrates among wealthier households, this report also shows that higher-income households are more resilient to increases in interest rates. This means, too, that home ownership increasingly requires a dual income.

The owner-occupied home is often referred to as the largest single asset that most households own. In countries like Australia and the USA, home ownership is promoted by government and linked to many aspects of future wellbeing. However, as recent HILDA analysis shows, owner-occupied households are becoming far less common.

The “Great Australian Dream” is expected to apply to only a minority of households next decade. With those in the already most marginalised parts of society most affected by mortgage stress, a change in the structures that incentivise home ownership is required to minimise the growing inequality gap.

Pockets of pain

The limitation with national averages is that pockets of pain are brushed over. The report drills into state-by-state analysis and metro vs regional comparisons.

While the largest mortgages across the country, averaging over $300,000, are in Sydney, mortgage stress is highest in Tasmania and South Australia.

Mortgage stress in Tasmania and South Australia sits well above the national average, as do their unemployment figures, 6.5% and 6.9% respectively, against a national average of 5.7%. Households in regional areas are also facing more acute mortgage stress than their city counterparts.

The housing market underpins the Australian financial sector

Regulators aren’t taking any chances. With nearly $1 trillion in outstanding mortgage debt, double the pre-GFC level, the 2014 Financial Systems Inquiry identified that mortgages are now a significant systemic risk. In a recent speech on the prudential regulator’s outlook, APRA general manager Heidi Richards stated that “the housing market now underpins our financial sector”.

APRA has been tightening the lending standards of the big banks. Effective from July 1, the big banks have been required to apply higher “risk weightings” to residential mortgages. These determine the amount of capital held against assets to limit the likelihood of insolvency.

The silver lining to this otherwise depressing analysis is that the risks to financial stability are relatively low. Home ownership concentrated amongst wealthier households actually means there is a high degree of aggregate resilience to changes in future interest rates and incomes.

However, the report’s focus is on current incomes. To brace for a true housing market downturn, the key will be monitoring employment and income statistics – unemployment rates as well as hours.

Author:Danika Wright, Lecturer in Finance, University of Sydney