Tag: Mortgage Stress

The latest data from our household surveys for May revealed little change in mortgage stress among households – still at around 41%, but there was a shocking rise in rental stress as the JobSeeker and JobKeeper supports were withdrawn, and the random lock-downs continue.

Even Property “experts” accept that affordability has deteriorated recently, as house prices rocket higher in many suburbs, although of course real interest rates are very low, for now, if rising ahead.

Our approach to measuring stress is unique in that we examine household cash flow – money in and money out. Given that many households saved hard last year though the heights of COVID, it is not surprising to see many now draining down those savings, by spending more. This means that their cash flow will in net terms be negative for now, and so will register as stressed. That said, if spending continues unabated financial difficulties will eventuate.

In addition we continue to see more households reaching for credit (from Buy Now Pay Later, to Pay Day loans) as well as equity release from property. In fact the latest hikes in perceived values has led to a run of refinancing, to try and pay down debt, or to provide funds to offspring for property purchase via the Bank of Mum and Dad. Again these one-off moves can adversely impact household stress measures in our methodology.

And we also note that many prefer not to accept the truth that some households are not home and clear in terms of their finances, given the uncertain part-time work, multiple jobs and zero hours contracts which many are on. But we continue to analyze households in net cash flow terms. If more funds drain away, compared with income, they are classified as stressed.

Across our segments we continue to see quite different dynamics emerging, with many younger households (often first time buyers) impacted, alongside the high growth corridors containing many first generation Australians, as well as some more affluent groups. Financial Stress takes no prisoners.

The mortgage stress counts are highest in high growth corridors in WA and VIC – where in some cases more than 80% of households in the area have cash flow issues.

Rental stress is more strongly registered in NSW and QLD, with Western Sydney and the Central Coast and Bundaberg in the top 10.

Property investors are having difficulty in Melbourne 3000, thanks to the lack of students and ongoing lock-downs. A number of VIC suburbs are impacted thanks to high vacancy rates, negative net yields and falling apartment values.

Overall financial stress, our aggregate measure reveals that Melbourne 3000 has the highest stress levels. That is followed by a number of the high growth corridors.

The continued pressure on households from low income growth, and rising living costs will persist, while the risks of interest rate rises grow with the competition of the Term Funding Facility at the end of June.

Households continue to wait for a magic bullet to solve their financial flow issues, and while some can draw on savings and equity, or reach for more credit, unless spending patterns are understood (half have no budgets), we think these trends will continue to bubble away.

Of course, financial stress is not the same a mortgage default, but those with cash flow issues are more likely later to end up having to sell their home, unless remedial action is taken.

Households in financial stress should certainly speak to their lender, prioritise spending, and be cautious about further loan commitments. There is no income growth “get out of jail card” for now.

The latest data from our rolling household surveys reveals that the pressure on many households continues to build, despite the headline news of a booming recovery and jobs growth. Of course the missing element remains underemployment, where we still see many households struggling to get the income they need to cover their ongoing commitments. This is how we define stress – when incoming cash flow is not sufficient to cover ongoing costs.

Mortgage stress rose to 41.1% of borrowing households which translates to 1.52 million households, with the end of JobSeeker and JobKeeper in March.

Within the series both mortgage stress and rental stress were higher, although there was a small improvement in Victoria. Mortgage stress remains highest in Tasmania, at 55.8%, while rental stress is highest in NSW. Property investor stress is highest in NSW and ACT, and overall financial stress (which is a weighted average of all stressed households, against all households) was highest in NSW and ACT.

Across the DFA household segments, many Young Growing Families (which includes significant representation of First Time Buyers) are exposed, as are households living in the high growth high construction corridors around our major centres. But we also continue to see more affluent households who are often highly leveraged, with multiple properties also being caught. It is also worth highlighting that many first generation migrants are being caught too.

The postcodes with the highest levels of mortgage stress (measured by count of households) includes Chipping Norton 2170, Tapping, Wanneroo 6065, Toowoomba 4350 and Narre Warren 3805. So the pressures are wide spread, with the highest counts in those high growth corridors.

Turning to rental stress, the footprint is rather different, with Melbourne 3000 at the top of the list (thanks to many students and young workers in the area) followed by 2770, Liverpool and surrounds, 2145 which includes Westmead and Wentworthville, 2540 Jervis Bay and surrounds, and 2250, the area around Gosford. So rental stress appears in a range of settings.

Investor stress is led off by Queensland post code 4670 which includes Bundaberg, 2010 which includes Surry Hills and Darlinghurst, Meadow Springs and Mandurah 6210, 2145 Westmead and 3000 Melbourne.

Overall financial stress (our aggregate measure) was highest in 2170, Toowoomba 4350, 27770, 3000 and 3029, which includes Hoppers Crossing. Again this shows the wide distribution of those under financial pressure.

We discussed this in our recent show on DFA, together with some heat maps

We updated our core market model to take account of these changes, with our main scenario seeking an ongoing rise in property values ahead, but determined by the trajectory of the virus, vaccine rollout and border controls.

In conclusion, while many households are experiencing a rebound, there are many who are still caught in significant and growing financial pressures. Given that costs of many services are rising, while income is not, plus the larger mortgages being written at the moment, we expect stress to remain elevated for some time. And given the long cycle between stress, and ultimate property sale or mortgage default, it is likely we will see a continued build up in those financially exposed ahead.

This was not meant to happen – after all the official story is we are in recovery mode – yet the latest results from our rolling household surveys tells another story as unemployment and underemployment rise further, even as Government financial support is tapered down. As a result mortgage stress – those households with a mortgage and cash flow pressures – rose to an astonishing 41.6% in November. Before the pandemic we sat at 32.9% in February, so nearly 10% more households are now feeling the pain.

The surveys showed some mixed drivers of this result. Sure, a number of larger firms have come off JobKeeper as the economy reopenes but more smaller firms are putting people on JobKeeper, even as the level of support is reduced. This was confirmed by the segmental analysis of the latest payroll data which showed growth among larger firms but a fall among smaller firms.

More households have had to recommence mortgage repayments now, with the ABA reporting that among the top 7 largest banks, deferred loans dropped from a peak of $250 billion down to $86 billion in November, with home loan deferrals by the seven largest banks are down to fewer than 145,000. But this has placed considerable pressures on households recommencing, even as unemployment continues to rise – to 7% in November according to the ABS and remember this is artificially understating the true picture as JobKeeper recipients are excluded.

The unemployment rate increased 0.1 pts to 7.0% (1.7 pts higher than a year ago)

Unemployment increased by 25,500 to 960,900 people (and increased by 238,900 over the year to October 2020)

The youth unemployment rate increased 1.0 pts to 15.6% (and increased by 3.1 pts over the year to October 2020)

Our analysis also examines Rental Stress, Property Investor Stress and overall Financial Stress by state and household segment.

Across the states, Tasmania still retains top mortgage stress spot in in percentage terms, followed by Victoria and Western Australia. Rental stress is highest in New South Wales and Victoria, and across Australia. On average 35.2% of those renting have cash flow issues. Among property investors, 25.6% reported a cash flow deficit, as rents fall, and vacancies rise. More are still considering selling – especially those holding high-rise apartments in Sydney and Melbourne.

Across our segments, mortgage stress is highest among young growing families, which includes many first time buyers who were attracted into the market by Government incentives. This will not end well. Those living in the high growth corridors are also under pressure, especially on the urban fringe. And we see more affluent households caught up in stress, thanks to higher levels of unemployment – and high leverage.

Rental stress is broad based, with many first generation migrants under pressure, as well as young affluent.

Many affluent households with investment property are stressed, thanks to the proliferation of multiple properties, and high leverage, even as rentals fall in some areas. Once again, units are most exposed.

Overall financial stress (an aggregate of the three elements we discussed) is broad based across our segments. This is a significant structural issues – and one which was already in play BEFORE the pandemic. But it is significantly worse now.

The top postcodes by mortgage, rental and investor stress are presented below. This data is sorted by the number of households impacted by stress (again in cash flow terms). We see high representation in high growth corridors across the country, as well as some inner City suburbs.

Investor postcodes show the location where the investor resides, not necessarily the location of their investment properties.

Overall financial stress is highest in the high growth corridors, areas where many households are under pressure, yet also areas where more development in under way and home land packages are being pushed very hard though the current Government schemes.

We also mapped the stress – here is an example of mortgage stress in Melbourne. This is to illustrate the patchwork nature of stress (orange and red are high stress areas).

Two final points, as Government support is wound back further, especially in the March quarter next year it seems likely stress will continue to bite, unless unemployment turns around faster than expected.

And as the ABA said recently

“Don’t wait till you are in over your head, talk to your bank, they’ll help you find a way through this. Don’t tough it out on your own”,

This is excellent advice, and should sound a note of caution to those who are considering a property move in the current environment. Mortgage stress can put considerable pressures on households, and often leads to a sale later. So new purchasers should be cautious, and develop their own cash-flows prior to committing – just because a lender agrees to make a loan, this does not necessarily mean its a sensible decision from a borrowers point of view – a bank has a completely different view of “risk”. So buyers beware!