Mortgage Stress, Oh Please!
Debate rages on regarding the direction the Australian Property Market is heading. Affordability is the lead topic and varying institutions are suggesting the market has peaked and will decline in the near future. A new discussion has emerged recently regarding mortgage stress and the fear mongers are selling the drama around some of the statistics that need to be put into context.
Digital Finance Analytics (DFA) has released new mortgage stress and default modelling for Australian mortgage borrowers, to end April 2017. Australia wide they estimate more than 767,000 households are now in mortgage stress with 32,000 of these in severe stress. This equates to 23.4% of households, up from 21.8% last month. They also estimate nearly 52,000 households are at risk of default in the next 12 months. DFA’s regional analysis shows that NSW has 211,000 households in stress, VIC 209,000, QLD 139,000 and WA 109,000.
Households are “stressed” when income does not cover ongoing costs that include outgoings and mortgage payments. Risk of default is derived by overlaying mortgage stress analysis with economic indicators such as employment, future wage growth and consumer price inflation.
If we were only looking at the DFA statistics, it sounds like Dooms Day is pending. But lets expand our range of vision to include the following data:
AVERAGE LOAN BALANCE Vs HOUSE PRICES
Source: ABS, APRA, Domain
The trends in the above chart show that the average loan balance has grown 15% in 5 years whilst at the same time property values have risen 44%. Would you be stressed if you borrowed $15 to buy something you could sell for $44?
NEW RESIDENTIAL LOANS APPROVED BY BANKS
SOURCE: APRA, Domain
For the December 2013 quarter, loans approved at or above a 90% LVR totaled $10.56 billion. For the December 2016 quarter that figure was $7.83 billion. The higher the LVR, the higher the exposure to mortgage stress and risk of default. With the majority of new loans in the 60% – 80% LVR range, the picture at current interest rate levels appears to be sustainable, rather than stressed.
NET WEALTH OF HOUSEHOLDS
SOURCE: RBA, Domain
The chart above shows that the value of household liabilities has also been steadily increasing. This is a statistic that in isolation could be concerning, but when viewed in relation to the total value of assets held by households, appears also to be sustainable. That is, there appears to be no clear case that the household sector has borrowed excessively.
Yes we have an affordability problem for Australians wanting to buy property, and yes there will be homeowners under mortgage stress, and yes there will be defaults. But hasn’t that always been the case? Is it possible that houses are affordable if buyers are willing to change their expectations or locations they are looking to buy? And is it also possible that regardless of the market or economic conditions, there will be some people that manage money (and therefore property) better than others?
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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs. When assessing any investment you should also consider that past performance is not a reliable indicator of future performance