The AFR has done a nice piece on the post code level analysis we completed, and a nice interactive map. Here is the guts of the article, citing DFA.
It’s not just households in Western Sydney and the outer suburbs of Melbourne and Brisbane who are feeling the pressure of paying their monthly mortgage.
A compilation of the top 100 postcodes most at risk of mortgage default by consultancy firm Digital Finance Analytics found a wide geographic spread of suburbs across the country where people could face financial collapse when interest rates start to rise.
The outer suburbs of Canberra, southern Tasmania, Darwin and southern Gippsland in Victoria are some of the regional areas that have been hit by mix of industrial closure, high unemployment and low wages growth, which leaves resident vulnerable to financial collapse.
Digital Finance Analytics principal Martin North said residents of Western Sydney were used to flying close to the wind when it came to household finances.
“There are clearly some western Sydney suburbs and inner-Sydney in the top 200 or 300 postcodes but this is about the probability of default,” Mr North told The Australian Financial Review.
“The probability of default is a complex matrix. It’s not just the lower socio-economic areas [like Western Sydney] because they don’t have big loans and already have more conservative loan criterias.”
Mr North said the postcodes where households are at risk are quite often in regional areas with increasing unemployment – and where they may struggle to find another job.
“The most difficult thing for a mortgage holder is suddenly losing your job because income goes from a certain level to a lower level and it’s quite hard to manage,” he said.
“Events across Australia impacting on employment are probably the best leading indicator of the probability of default.”
Many of those in regional areas are also geographically isolated if they lose their jobs – and don’t have the same employment alternatives that may be on offer for those living in bigger cities such as Sydney, Melbourne and Brisbane.
Two per cent increase poses high risk
In a breakdown of the top 100 postcodes, almost a quarter were in Tasmania (23), followed by Victoria (19), NSW (18), Queensland (16), South Australia (14) and Western Australia (5).
The closure of manufacturing industries in northern Adelaide, the mining downturn in Western Australia, Queensland and in NSW’s Hunter Valley and the public service heartland of Canberra are all mortgage stress hotspots, according to the modelling.
There was also an intergenerational element with most of the households at risk of default including those under 35-years-old who have been lured by record low interest rates.
“My view is these are households that are maxed-up because of the debt they’ve got and with current low interest rates they are just getting by,” Mr North said.
“But if interest rates go up this is where you’ll see the first impact. If interest rates are 2 per cent higher it would create significant pain for households.
“And the risks seem to be higher amongst younger households. I think people have been lured into the market probably sooner than they should have by lower interest rates and rising property values.”
The Canberra postcodes of 2902 (Kambah), 2900 (Tuggeranong, Greenway) and 2903 (Oxley, Wanniassa) top the mortgage stress list, with Tasmanian postcodes in the state’s north and south rounding out the top 10.
Queensland’s mining belt of Mackay (postcode 4721), Brisbane’s outer suburbs (4131), and the outer-suburbs of Melbourne (Essendon, Tullamarine) as well as Hunter Valley’s 2343 scrape into the top 50.
The top 100 postcodes are rounded out by more mining towns (Fitzroy and Blackwater in Queensland), the suburban battlers in south-east Queensland’s Logan (4128), NSW’s Macquarie Fields (2564) and The Ponds (2769).
The typical assumptions about mortgage stress is where more than 30 per cent of household income is spent on home repayments.
But Mr North said this was too simplistic. He also overlays industry employment data as well as information from credit rating agencies about actual defaults.
The National Australia Bank has red-flagged 40 postcodes across the country where business and personal loans are at a higher risk of default, especially when mixed with the stressful combination of rising interest rates and higher unemployment.
In its 40 hotspots, NAB is conducting a more stringent assessment of loan applications, including increasing the amount of equity that borrowers require.
Reserve Bank of Australia assistant governor Christopher Kent last week said the central bank predicted unemployment would remain high until 2017.
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