01 Oct Mortgage stress on the rise – Elizabeth Tilley
With so much talk about the price of power and what’s happening with childcare and so on, it’s no wonder that there are indications mortgage stress in Australia is probably at an absolute peak. The number of households in mortgage stress increased in August. That was according to a report released by Digital Finance Analytics, and the report was compiled for News Ltd. Real estate reporter for The Courier-Mail, Elizabeth Tilley gives the detail.
Kevin: With so much talk about prices for power and what’s happening with childcare and so on, it’s no wonder that a report has been released that has indicated that mortgage stress – well, we’ll talk about Queensland – in Australia is probably at an absolute peak. The number of households in mortgage stress increased in August. That was according to a report released by Digital Finance Analytics, and the report was compiled for The Courier-Mail.
Joining me now the senior real estate reporter for The Courier-Mail, Elizabeth Tilley.
Elizabeth, thank you for your time. Did the outcome of the report come as any sort of a surprise to you?
Elizabeth: Not really, Kevin, because we have been monitoring this for a little while now. I’m in contact with Martin North, the principal of Digital Finance Analytics, usually on a month-by-month basis, and things have been gradually getting worse for households for the last few years, really, and each month, it just seems to get worse and worse.
But this month in particular, the August figures that this modeling has been done for, really they’ve put it down to three main things. And that’s higher power prices – which we know of course is the number one issue that households are dealing with at the moment – council rates, also another one that’s gone up during that time, and childcare costs apparently also really started to bite during the month of August.
So it was a particularly difficult month for households on top of the usual rising living costs they’re facing, and household debt, and obviously mortgage. This modeling also shows that only a small jump in interest rates would push a lot more households into the risk of defaulting on their home loan.
Kevin: Yes, it’s a real problem for the Reserve Bank to think about, because interest rates are at an all-time low. I know they could go down a little bit further, but everyone’s tipping that they will, in fact, increase at some stage. We’ll talk about that in just a moment. But that’s actually going to make the situation even worse, so it’s really hard for them to make the kinds of decisions they need to make based on some of the reports that are coming out, Elizabeth.
Elizabeth: It is. I’d love to be a fly on the wall in their Board meetings and just see exactly what they’re discussing over the table, because it’s really a tough one, isn’t it? They have to weigh up all the pressures that are happening out there, but then meanwhile, especially this time of year, spring, we have all the banks now coming out with all these discounts for home loans, which some analysts are saying is going to see a flood of more people into the market and taking advance of that.
Yes, it’s a very delicate balancing act. But household debt is their biggest concern, I think, and we hear about it quite often that that is the problem. It’s too high, and there’s just no financial buffer there for many households. So, it means that even just the tiniest added pressure can tip many of them over the edge and into stress, and that is a big concern.
As you said, rates aren’t expected to rise for a while yet, but when they do, I just don’t know how people are going to be prepared for it. Many households are really going to feel the pain.
Kevin: The report from Digital Finance Analytics looked at it by postcode. It was quite interesting to see that the postcode they highlighted as being the worst was 4305, which is Toowoomba in Queensland. The average age in Toowoomba is extremely high, because we’ve seen a number of people retire off properties and they go and buy a home with their retirement nest egg in Toowoomba.
I guess this really highlights the impact of some of these higher prices like council rates and power rates on the elderly, as well as the young, growing families, Elizabeth.
Elizabeth: Yes. I think you’re right. I think they’re definitely feeling it just as much. They’re obviously living on their retirement savings, if they have much of that, and obviously their super funds are getting eaten into as well with not very high interest rates there.
Yes, it’s interesting the modeling finding that that postcode really would be severely affected if interest rates were to rise, and at the moment we are seeing a large number of households there being affected. About 30% of their households do have a mortgage at the moment, and they are feeling it the most.
Digital Finance Analytics is saying that that’s partly because that area does have high unemployment. Of course, we’re seeing stagnant wages growth particularly here in Queensland. House prices have seen a bit of a rise in that area in recent years.
And according to the Digital Finance Analytics, there are actually a lot of new mortgages that have been accumulated in the last few years, so that also could be attributing to the pressure that’s being felt there, as well. And yes, a bit of a hangover maybe left from the mining boom, resources boom as well still there.
Kevin: Yes. We talk about when people borrow to buy a property, they should build in some kind of a buffer and allow for increased rates, but it’s bringing on a whole new idea about how that buffer should be structured – not only structuring an increase in rates but also an increase in some of these essential costs in the household, as well.
Elizabeth, can I just ask you from a national perspective, did you have a feel for how many households are actually in financial stress across the nation due to increased mortgage payments?
Elizabeth: Across the nation, it’s about 860,000 estimated to be in the mortgage stress, and that’s up 40,000 from July. So, in one month, that’s a big increase in households to be under mortgage stress. And more than 20,000 of those are in severe stress. That’s about 26.4%, so that’s now over a quarter of households nationally that are suffering from mortgage stress.
And there are also about 46,000 households at risk of default in the next 12 months. Interestingly, that’s down a little bit from July – down 7000, in fact – and that’s because revisions to the expectations of future mortgage rate rises have come down or been dialed back a little bit, because we are seeing a lot of analysts and economists now predicting a rate rise to happen still but not until the second half of 2018, according to comparison website Finder, another economist survey there.
Because of that, it’s looking like that might put the brakes on the number of houses at risk of default for a little while longer, at least delay that from happening. But it’s still a huge problem. It’s going to happen at some point once rates go up, so it means they have a breather for a little while.
But that’s still a very large number, and yes, the main drivers of that, living costs, wages not growing, and under-employment being on the rise, under-employment particularly being the issue we hear about whenever those numbers come out.
It’s a deadly combination, and it’s touching households right across the country, not just in those mortgage belts. Although as I mentioned here in Queensland, they are mostly in those regional areas, Toowoomba and then Mackay I think was the second worst-hit postcode.
Kevin: Elizabeth, great talking to you. Elizabeth Tilley is the senior real estate reporter for The Courier-Mailand joined me to talk about the Digital Finance Analytics report.
All the best, Elizabeth, and thanks for your time.
Elizabeth: Thanks, Kevin.