Latest Greater Melbourne Mortgage Stress Mapping

We turn our attention to VIC and Greater Melbourne with the latest mortgage stress mapping. Read about our approach here.

We are looking at owner occupied loans, with data to 1st March 2017.

First here are the top twenty post codes across Victoria with the largest numbers of households in mortgage stress.

Frankston, 3199 heads the list and is suburb of Melbourne on the Mornington Peninsula about 39 kms from the CBD. More than 30% of households have a mortgage here, and the average age is 38 years old.

Next is Berwick, 3806, a suburb of Melbourne, South East and about 41 kms from the CBD. More than 52% of households have a mortgage and the average age is 35 years. Berwick has a relatively higher proportion of severely stressed households (shown by the blue bar above). These households are in more immediate danger of potential default.

Third is Ballarat East, 3350, a suburb of South Western Victoria, Ballaratt, and about 99 kms from Melbourne. More than 30% of households here have a mortgage and the average age is 38 years.

Fourth is Rowville, 3178, a suburb of Melbourne, South East and about 26 kms from Melbourne. The average age is 36 years and 54% of households have a mortgage.

Fifth is Derrimut, 3030, a suburb of Melbourne, Geelong, and 18 kms from the CBD. The average age is 29 years and more than 70% of households have a mortgage. Note again the number of severely stressed households in the district.

Finally, note Carnegie, 3163, a suburb of Melbourne, East and about 11 kms from the CBD. 28% of households have a mortgage, and the average age is 35 years, but there are more severely stressed households here, than stressed. We think this is an indication of potential relatively higher risks.

Here is a stress geo-map for the areas around Greater Melbourne. The Blue areas shows the highest stress counts.

Next time we will look at Greater Perth.

Latest Greater Brisbane Mortgage Stress Mapping

We continue our series on mortgage stress mapping by looking at our results across QLD, with a focus on Brisbane. You can read about our approach to mortgage stress modelling here.

Harristown 4350 leads the list with more than 4,000 households caught. Harriston is about 109 kms from Brisbane near Toowoomba. Around and 28% have a mortgage. The average age is 37 years old.

Next is Manunda 4870, a suburb of Cairns, and about 1391 kms from Brisbane. The average age of the people in Manunda is 38 years of age and 21% of households have a mortgage.

Third is Geebung 4034, a suburb of Brisbane about 11 kms from the CBD. The average age of the people in Geebung is 37 years of age and 38% of households have a mortgage.

Here is the mortgage stress geo-map for the area around Brisbane.  The blue areas show those post codes with higher number of stressed households.

Next time we look at Victoria.

Nearly 2M Households Locked Out Of Property Market

The latest data from our households surveys highlights the core problem facing many Australian households at this time. There are nearly 2 million households who are unable to purchase their own home.

Across the states, 33% reside in NSW, 26% in VIC, 20% in QLD and 11% in WA.

We can segment these households using our core analytics. Around 8% of these we classify as “first time buyers”, who are actively seeking and saving to purchase; 28% we identify as “want to buy”, who are saving with the hope to buy in the future; and 64% as “property inactive”, who for all intents and purposes are not actively seeking to enter the market at the moment. This inactive group continues to grow relative to the general population. All three groups are likely to be renting, living family or friends, or in other less permanent housing options.

We can also split these down across the states. From example, in NSW there are 228,000 households actively trying to get into the market, 185,000 in VIC, 158,000 in QLD and 85,000 in WA.  This provides important insights into the size of the housing problem in the country.

This is an critical additional perspective, which we need to bear in mind as we consider the 20% of existing households with a mortgage who are in some degree of mortgage stress at the moment and the 30% of households who hold investment property.

Once again, this is a big, systemic issue which needs mature and joined up policies to address the core elements that have combined to make such an intractable problem. Changing settings at the margins will not be sufficient to rectify an inter-generational emergency.

Households who do not hold property are significantly less confident finally speaking, as results from our household finance confidence security index show.


This Week The Investor Intention Indicator Is Down Again

We just got the results back from this week’s household surveys, and yes, we went straight to the investor intention to transact series. It is down again, now for the fourth straight week, and continues the trend we reported last week. Whilst “a swallow does not make a summer”, it could be a leading indicator of trouble ahead.

If the data is correct, the current home sales momentum is likely to slow in coming months.

The Property Imperative 8 Now Available

The latest and updated edition of our flagship report “The Property Imperative” is now available with data to end February 2017. This eighth edition updates the current state of the market by looking at the activities of different household groups using our recent primary research, and other available data. It features recent work from the DFA Blog and also contains new original research.

In this edition, we look at mortgage stress and defaults across both owner occupied and investment loans, housing affordability and the updated impact of “The Bank of Mum and Dad” on first time buyers.

We also examine the latest dynamics in the property investment sector including a review of portfolio investors, and discuss recent leading indicators which may suggest a future downturn.

The overall level of household debt continues to rise and investment loans are back in favour at the moment, though this may change. Here is the table of contents.

1       Introduction. 
2       The Property Imperative – Winners and Losers. 
2.1         An Overview of the Australian Residential Property Market.
2.2         Home Price Trends. 
2.3         The Lending Environment. 
2.4         Bank Portfolio Analysis. 
2.5         Broker Shares And Commissions. 
2.6         Market Aggregate Demand.
3       Segmentation Analysis. 
3.1         Want-to-Buys. 
3.2         First Timers.
3.3         Refinancers.
3.4         Holders. 
3.5         Up-Traders.
3.6         Down-Traders. 
3.7         Solo Investors. 
3.8         Portfolio Investors.
3.9         Super Investment Property. 
4       Mortgage Stress and Default.
4.1         State And Regional Analysis. 
4.2         Stress By Household Profile. 
4.3         Stress By Property Segments.
4.4         Stress By Household Segments. 
4.5         Post Code Level Analysis.
4.6         Top 100 Post Codes And Geo-mapping. 
5       Interest Rate Sensitivity. 
5.1         Owner Occupied Borrowers. 
5.1.1          Sensitivity by Loan Value. 
5.2         Cumulative Sensitivity. 
5.2.1          Owner Occupied Borrowers. 
5.2.2          Investment Loan Borrowers. 
5.2.3          Owner Occupied AND Investment Loan Borrowers. 
6       Housing Affordability And Hot Air.

Request the free report [61 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

Note this will NOT automatically send you our ongoing research updates, for that register here.

Is Investor Property Appetite On The Turn?

Each week we receive updated data from our household surveys. One element in the survey looks at investor appetite – specifically whether households are intending to transact within the next 12 months. It is a leading indicator of future investment loan volumes.

However, in the past three weeks we have seen a change in intention. It has started to fall quite significantly (and actually represents the biggest move in the 10 years of the survey).

The chart plots the average intentions each week against the volume of new investor loans written each month. We see a significant downward movement in intention. This is being driven by a range of factors including concerns about future property values, falling rental returns, rising investment interest rates and most recently concerns about potential changes to the generous tax breaks which currently are enjoyed by property investors.

It is early days but it does appear investor property purchase intentions are on the turn. If this is the case, then auction clearances, investor lending momentum and property price rises may be be impacted. We will watch the next few weeks’ data with interest.

This Is Why Mortgaged Household Are Debt Exposed

When we published our sensitivity analysis on mortgaged households, which shows that more than 20% were on the edge financially speaking even at current low rates, a number of people asked why this was so, given the assumed affordability buffers and other underwriting safeguards.

Well, apart from the obvious issues of static incomes, rising costs of living, and potentially higher interest rates ahead, many mortgaged households also have other debts to repay. So today we run through some of our survey results looking at these other household debts. And it is not pretty.

To start, here is the average balances for mortgaged households, looking at their use of unsecured credit (e.g. personal loans, store cards etc) and credit cards. In the case of credit cards, we show two balances, first the current outstanding balance, and second the average revolving (hard core) debt outstanding.  Households with debts, on average and on top of the mortgage have $12,000 in unsecured loans, $11,000 in card debt, of which $10,000 is revolving.   These can cost as much to service each month as the mortgage repayment!

We can slice and dice the households, using some of our custom SQL views. For example, here are the average balances by household age bands.  Households between 40 and 59 have the larger loan and revolving balances, though interestingly, those 60-70 have the largest card balances.

As incomes rise, debt levels also rise, so some of the debt is owned by households with more ability to repay. However, remember the larger number of households are in the first three bands, where debt is still rife.

We can examine this debt by our master household segments. Once again, more affluent households have larger debts, but young growing families have on average close to $20,000 in debt, including some on revolving cards (where interest is charged at a high rate).

We can examine the data across our regions. Urban centres, including ACT, Greater Sydney and Melbourne have the highest debt levels. Many of these households also hold the largest mortgages.

Finally, it is interesting to note that from a digital behaviour standpoint, those younger households who are online most of the time and prefer to use digital channels (Natives) borrow more than Luddites (those who prefer not to go online, but the larger debts are held by households who have migrated online. These Migrants are progressively using online channels more than ever.  You can read more about our channel use inour report  The Quiet Revolution.

So, to sum up. Many households have large mortgages AND other debts, including credit cards and personal loans. This entire portfolio of debt must be considered when looking at their sensitivity to rising rates, and when comparing static incomes with rising debt repayments. Just looking at the mortgage gives only part of the full picture.

Much of this debt would not exist when the bank made their mortgage underwriting decision. That point in time view however does not necessarily still hold true. Should ongoing affordability testing be required by the regulators?

More On Household Debt, From The ABC

ABC’s RN Breakfast‘s Business Reporter Michael Janda discussed household debt as part of his segment on Radio National Breakfast this morning, and was kind enough to mention our recent research on owner occupied and investment housing debt sensitivity.

There was a subsequent flurry on Twitter discussing the DFA research approach.

To be clear, our household modelling is based on a rolling 26,000 statistically robust omnibus survey, to which each month we add 2,000 new households and drop off the oldest set. We have data from more than 10 years of research and it feeds our programme of activity and is reflected in the DFA blog.

From a mortgage stress perspective, we run our modelling, based on our household profiles and segments, which looks at net cash flow (before tax) and we also sensitive the modelling based on potential future rate movements. We take account of their total financial position, including other debt demands, and costs of living.

You can read more about our modelling here.  If you want to read our mortgage stress work, this overview is a great place to start.

P.S. Our research is separate and distinct from other research in the housing affordability arena, including the international Demographia survey. Whilst some of the findings may align, the research is based on different underlying research sources.


More First Time Buyers Open An Account At “The Bank of Mum and Dad”

We have updated our analysis of assistance first time buyers are getting from their families in a desperate effort to get into the housing market at a time when the entry barriers in terms of price and affordability are as high as ever they have been. In addition, high loan-to-value loans are less available, so first time buyers need a larger deposit, and first owner grants are harder to access. Savings interest rates are also very low.

We released analysis a few months back, which caused quite a stir as it highlighted the inter-generational  issues in play. We have now updated the quarterly analysis with data to December 2016.

First, more first time buyers are getting help from parents – up to 54% in the past quarter. This help varies from a loan for a deposit, a cash present, help with transaction expenses, or ongoing assistance with mortgage repayments or other household expenses.   Parental guarantees are falling out of favour.

Parents are able to assist, thanks to the wealth effect created by home price appreciation, which is still occurring in the eastern states, though more patchily elsewhere.

Just under half the assistance is going towards first time buyers in NSW (mainly Greater Sydney), where the affordability issues are most difficult, and home prices the highest. But other states are also, to some extent, also in the game.  Ignoring the volume growth, the percentage mix has been relatively stable.

But here is the volume picture, which shows the relative number across states (note the small counts in some states are less statistically robust), but the trends are clear.

Another cut on the data is looking at the type of property being purchased. In 2015, more investment property was is the mix, but now the growth is among owner occupied purchasers.

In terms of the value of the financial contribution, it varies. But for those making a loan or payment direct to assist in a purchase by way of a deposit, the average amount is now north of $85,000.

If parents bring forward payments to assist their offspring, it is worth asking whether this act of kindness may have unintended consequences.

  • First, are parents giving away some of their future financial security?
  • If it is a loan, is the basis of repayment clear, and documented?
  • When a bank assesses a mortgage application do they consider the source of the deposit – receiving a “seagull” lump sum is not the same as demonstrating a history of saving, and the risk profiles down the track are different.

It also raises complex questions around equity between siblings, and a whole raft of questions relating to inter-generational finance.

It is also worth remembering that more first time buyers are going to the investment sector before purchasing their own home for owner occupation, as our first time buyer tracker shows.

So Just How Sensitive Are Property Investors To Rising Interest Rates Now?

Having looked at changes in investment loan supply, and the motivations of the rising number portfolio property investors, today we use updated data from our rolling household surveys to look at how property investors are positioned should mortgage rates rise. In fact, for many, rates have already been raised, thanks to lender repricing independent of any RBA cash rate move, some as much as 65 basis points. We think there is more to come, as loan supply gets tighter, international financial markets tighten and competitive dynamics allows for hikes to cover capital costs and to bolster margins.

To assess the sensitivity we model households ability to service mortgage debt, taking into account their other outgoings, and rental income.  We are not here looking at default risk, but net cash flow. How high would rates rise before they were under pressure? Where they also have owner occupied loans, or other debts, we take this into account in our assessment.

The first chart is a summary of all borrowing investor households. The horizontal scale is the amount by rates may rise, and for each scenario we make an assessment of the proportion of households impacted, on a cumulative basis. So as rates rise, more households would feel pain.

The summary shows that nationally around a quarter of households would struggle with a rate hike of up to 0.5%, and as rate rose higher, this rises to 50% with a 3% rate rise, though 40% could cope with even a rise of 7%.

So a varied picture. But it gets really interesting if you segment the analysis. Those who follow DFA will know we are a great believer in segmentation to gain insight!

A state by state analysis shows that households in NSW are most exposed to a small rate rise, with 36% estimated to be under pressure from a 0.5% rise (explained by large mortgages and static rental yields), compared with 2% in TAS.

Origination channel makes a difference, with those who used a mortgage broker or advisor (third party) more exposed compared with those who when direct to a lender. The pattern is consistent across the rate rise bands.  This could be explained by brokers knowing where to go to get the bigger loans, or the type of households going to brokers.

Households with interest only loans are 6% more exposed to a small rise, and this gap remains across our scenarios. No surprise, as interest only loans are more sensitive to rate movements. We have not here considered the tighter lending criteria now in play for interest only lending.

Our master segmentation reveals that it is Young Affluent and Young Growing Families who are most exposed, followed by Exclusive Professionals. Some of the more affluent are portfolio investors, so are more leveraged, despite larger incomes.

Finally, we can present the age band data, which shows that those aged 40-49 have the greatest exposure as rates rise, though young households are most sensitive to a small rise.  Note this does not reveal the relative number of investor across the age groups, just their relative sensitivity.

This all suggests that lenders need to get granular to understand the risks in the portfolio. Households need to have a strategy to prepare for rate rises and should not be fixated on the capital appreciation, at the expense of cash flow management, especially in a rising rate environment.