A Cumulative View Of Mortgage Rate Sensitivity

We had significant interest in our recent posts on mortgage rate sensitivity in a rising market. One recurring request was for a cumulative view of rate sensitivity. So today we post these views on a segmented basis, using our master household segmentation.

A quick recap, we updated our analysis of how sensitive households with an owner occupied mortgage are to an interest rate rise, using data from our household surveys. This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards.

To complete this analysis we examine how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. We then run scenarios across the data, until they trip the mortgage stress threshold.

At this level, they will be in difficulty.  The chart shows the relative distribution of borrowing households, by number. So, around 20% would have difficulty with even a rise of less than 0.5%, whilst an additional 4% would be troubled by a rise between 0.5% and 1%, and so on. Around 35% could cope with even a full 7% rise.

The chart below shows a segment view of this sensitivity. We add the score for each interest rate band. Young Affluent households are most sensitive to rate rises, thanks to large mortgages and static incomes. Young Growing Families are not far behind, but their household budgets are quite different. Other segments are more resilient, though a proportion of Exclusive Professionals are also highly leveraged. This first view takes account only of the owner occupied mortgages.

We can also overlay investment mortgages, and this changes the picture somewhat, when combined with owner occupied statistics. We see that the extra commitments have lifted the rate sensitivity, for example moving Exclusive Professionals from 36% to 54% exposed to a small rate increase.

Overall we see that some households really have very little headroom to cope with rising rates, a symptom of high household indebtedness.  Others are well protected and are also paying ahead.

Positive Property News Supports Household Finance Confidence

The latest Digital Finance Analytics Household Finance Confidence Index, to end December is released today. Overall household confidence is buoyant, and above the neutral setting. Sitting at 103.2, it is up from 100.02 in November.

The property “fairy” has been generous in that property is the key to the index at the moment, with positive news on home price rises, and the effect of the low interest rates following the last RBA cash rate cut flowing through. Home owners with an investment property have now overtaken the confidence score of owner occupied property holders, but both are higher. Those households who are not property active however continue to languish.

We see significant state variations, with those in NSW and VIC most confident, whilst those in WA, although slightly higher, is significantly off the pace.  The impact of changes to the first owner grant there will not flow through into the results for some time to come.

The impact of positive property news has swamped a couple of the negative indicators. For example, more households are saying their costs of living have risen in the past 12 months.

In addition, real incomes, after adjusting for inflation are static or falling. Very few have had any pay rises above inflation, and many none at all.

So, it seems the future of household confidence is joined at the hip with the future of property. In the light of our recent mortgage default modelling, in a rising interest rate market, this may be a concern as we progress through 2017. But at the moment, households are having a party!

By way of background, these results are derived from our household surveys, averaged across Australia. We have 26,000 households in our sample at any one time. We include detailed questions covering various aspects of a household’s financial footprint. The index measures how households are feeling about their financial health. To calculate the index we ask questions which cover a number of different dimensions. We start by asking households how confident they are feeling about their job security, whether their real income has risen or fallen in the past year, their view on their costs of living over the same period, whether they have increased their loans and other outstanding debts including credit cards and whether they are saving more than last year. Finally we ask about their overall change in net worth over the past 12 months – by net worth we mean net assets less outstanding debts.

The Full 100 Mortgage Stress Listing

To complete our series on mortgage stress, based on our household surveys, here is the complete list of the top 100 most stressed suburbs, and their relative position on the default list, as at December 2016.

Victoria has the highest number of suburbs in the listing.

As we discussed yesterday, this is based on the absolute number of households in the suburb who are in difficulty.  You can also watch our video blog where we discuss the research.

Running our risk models, we expect the banks to be reporting higher mortgage defaults next year, with a lift in write-offs from around 2 basis points, to 4 basis points. However, this is still at a low, and manageable level given the capital buffers they hold. We do expect provisions though to rise.

New DFA Video Blog – Household Mortgage Stress and Defaults

Using data from our household surveys in this new video blog we discuss the findings from our latest modelling. More than 22% of households are currently in mortgage stress, and 1.9% of households are likely to default. Both are likely to rise next year.


Top 20 Postcodes For Mortgage Stress Across Australia

Now we get to the pointy end of our mortgage stress and default analysis. Today we list the top 20 post codes across Australia where the highest number of households currently in mortgage stress reside. We also reveal our estimate for the number of defaults which we expect to occur in the coming months.

It is worth saying that the percentage of households stressed or at risk of default, in a particular post code, varies considerably, but we have chosen to look at the actual number of households this represents. This is because there are a number of post codes where the percentage is very high, but off a very low number of householders. Statistically speaking such low numbers would make us less certain of the accuracy of the estimates. But by choosing to focus on the absolute number of households involved, the estimates are more firmly grounded. In any case the numbers involved, if larger, makes a material difference to the economy, and the banking system.

So, then, here is the list. The post code with the highest number of households in mortgage stress in December 2016 is Harristown – 4350 – in Queensland. It is about 109 kms from Brisbane. This area covers Toowoomba, Harristown, Glenvale and Rockville etc and a population of close to 60,000. Many of the households here are younger. Incomes are lower than the QLD average. More than 4,500 households there are in difficulty and more than 170 households in the district risk mortgage default.

Within the top 20 nationally, the post code with the highest level of default risk is Lamington, WA, a suburb of South East & Central. It is about 549 kms from Perth.  The region includes Kalgoorlie, Lamington and Williamstown, etc. Many of these households are in the younger aged segments.  Incomes are higher than the WA average. Here more than 2,600 households are in mortgage stress, and more than 200 are likely to default.

The distribution of stressed households in also interesting. Within the top 20, Western Australia has the largest number of households (26.4%), just ahead of Victoria (26.38%), but off a smaller population base. Shows the pressure on households in the west.

Next time we will look in more detail at some the state levels data.

A Segmented View Of Mortgage Stress and Default

As we continue our series on mortgage stress, using the latest data from our surveys, we look at how stress aligns with our core household and property owning segments.

To set the context for this, here are a couple of charts showing the mortgage distribution by income and age bands. The majority of mortgages are held by households with an income of between $50,000 and $150,000.

Mortgage stress and default are slightly higher across the lower income bands, but note that households with substantially higher incomes can also be in severe stress. But of course the absolute number are very small.

The highest proportion of mortgages are held by those aged 30-39, more than 30%.

Default probability is higher among younger and older households. Whilst the number of these households with a mortgage is relatively low, more are in severe mortgage stress because their incomes are much lower. More generally, some mortgage stress is evident across all age bands. In volume terms, the highest stress volumes are found in those 30-39 years.

Next we turn to our property segmentation.  Those holding property account for the largest segment of the market. You can read about our segmentation approach here.

Probability of default is highest among first time buyers, who also have the highest proportion of severe mortgage stress. The segment with the lower risk and levels of stress are those seeking to trade up.

On interesting finding, bearing in mind we highlighted the rise of first time buyers seeking help from “The Bank of Mum and Dad“, is that those who do get help are more likely to default. So, assistance from parents may be a two-edged sword.

Finally, we turn to our master segmentation. The number of households with a mortgage varies across these segments. The value distribution footprint is quite different, with the exclusive professional and young affluent segments holding the larger average mortgage.

Mortgage stress is highest among the disadvantaged fringe, though their mortgages are relatively lower and default rates are relatively low. Wealthy seniors registered high levels of severe mortgage stress, thanks to pressure on incomes (the impact of low returns from bank deposits and rentals are important here).

However, the highest risk of defaults sits with the younger segments. Young affluent households, with large mortgages are most exposed because their incomes are flat whilst they are highly leveraged, so as interest rates rise, they are exposed. Many have bought new high-rise apartments in the inner city areas.

Young growing families may have, on average smaller mortgages, but their finances are tight, with little room to maneuver, and any rise in interest rates will be a problem for them. Costs are living are moving higher for this group, especially child care costs.

So, we think effective segmentation is critical to understand the various portfolio risks which reside in the bank’s mortgage book. We need to move beyond LVR and LTI.

Next time we will look at some of the post code level data.

Mortgage Stress Covers 18.5% Of Book Value

Containing our latest series on mortgage stress and probability of default, we look further at the distribution of mortgage stress and potential defaults, using data from our household surveys, which includes results up to the middle of December 2016.

Building on the data we discussed yesterday, it is worth remembering that the bulk of mortgages reside in just a few zones across the country. This chart shows the number of loans in each of the major cities and regional areas, as a proportion of the total – we are looking here at owner occupied loans. The urban centres of Sydney, Melbourne and Brisbane hold the bulk of the loans, add in the rest of NSW and Perth, and you have more than 80% of all loans covered. So what happens in these areas is significant from a portfolio point of view. We include both loans from the banks (ADIs) and non-banks in this analysis.

We can then look at the same analysis, but by loan value. Given the larger loans in Sydney, thanks to higher prices, the distribution based on value is more skewed, with more than 35% of loans in the greater Sydney region.

If we then overlay those households who are in mortgage stress, we see that in value terms, 6% of the portfolio in stress is in greater Sydney, 3.5% in greater Melbourne, and just over 2% in greater Perth.

Total this up, and we conclude that in value terms, 18.5% of the current owner occupied loans are held by households in some degree of mortgage stress.  This proportion has been rising over the past couple of years, as income growth slows, whilst household debt rises.

Another way to look at the data is by a more granular regional break down. Here is the probability of default by region, plus the latest reading on mortgage stress. The highest probability of default can be found in the Kalgoorlie, Curtin and Brand regions of WA. Regional WA probability of default sits at around 4%.

Ballarat, Horsham and Alice Springs has the highest rate of mortgage stress. But, when you look at the relative distribution of mortgages on the same basis, we see that the bulk of the mortgages reside in just a few regions. In other words, there may be high stress levels, but on low absolute volumes of loans. Once again, to see what is really going on, you need to get granular.

Next time we look at stress and default by our segmentation models.

Mortgage Stress And Probability Of Default Is Rising

We have just finished the December update of our mortgage stress and probability of default modelling for the Australian mortgage market.

Our model has been updated to take account of the latest employment, wage, interest rate and growth data, and we look are the current distribution of mortgage stress (can households settle their mortgage repayments, on time without financial pressure?) and make an estimate of the probability of households defaulting on their repayments by more than 30 days. The former uses our survey data on mortgages held, interest rates applied, and income available in the light of other financial commitments. Probability of default overlays the broader economic drivers. The base analysis is completed at a customer segment level by post code then rolled up to form various data views. In the next few days, we will discuss the findings in some detail. You can read more about our approach here. We also also reveal the current top 100 post codes for mortgage stress and mortgage defaults across the nation.

To begin, here is a summary by states, split down by CBD and rest of state.

The highest probability of default can be found in regional WA, thanks to pressure in the mining belt. 30 days defaults will be close to 4%. Here, around 25% of households are in mortgage stress, including some in severe stress – see our descriptions here.

Default expectations are also high in and around Perth, where employment prospects are faltering, and incomes under pressure. In QLD, away from Brisbane, we see similar issues. The ACT has the lowest level of default probability.

The highest levels of mortgage stress are found in Tasmania, and across Regional NT, where more than 30% of households are under pressure. We also see hot spots in regional areas.

Of note is the high proportion of households in greater Sydney in severe mortgage stress – at 6.2% of borrowing households. This is a function of large mortgages (driven by high prices), rising interest rates AND flat incomes. By way of comparison, Melbourne households in severe stress sit at 3.3%, as mortgages are a little smaller. They are both higher than the national average of 2.8% of households.

Combined, across the country, more than 22% of all households are now in some degree of mortgage stress.

Next time we will dig into the more specific geographic footprints, because you really have to get granular to make sense of what is going on. Averages across the national simply mask what is going on.  Later will will look at loan-to-income and debt servicing ratios which are also deteriorating for many.  Then finally we will look at the loss implications for the banking sector.


The Property Imperative 7th Edition Is Available

The latest edition of our flagship report “The Property Imperative” is now available. The seventh edition updates the current state of the market by looking at the activities of different household groups using our recent primary research, blogs and other available data.

In this edition, we look at household debt servicing ratios, a critical indicator of potential mortgage stress in a low income growth environment. We focus on the impact of “The Bank of Mum and Dad” on first time buyers.

We also examine the latest dynamics in the property investment sector and discuss the future of commissions in financial services.

property-imperative-7-faceIn summary, the rate of mortgage loan growth is slowing, but the overall level of household debt continues to rise and investment loans are back in favour.

Request the free report [49 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.

Mortgage Stress – It’s All About Granularity

We have updated the Digital Finance Analytics Mortgage Stress Analysis, to August 2016, using data from our household surveys. Contrary to what might be thought, whilst the ultra-low mortgage rates are easing the finances of some households, mortgage stress still exists, and it’s iron hand is being felt by more than 21% of households. But it is not equally spread across the population, so you need to get granular to see what is going on. Worth though noting the Roy Morgan data we reported already, estimated 18.4% of households were in mortgage stress, so some correlation.

Over the next few days we will drill into the details to highlight where the pain is most severe, but today we start with an overview.

Before we start, we define mortgage stress, not as a fixed percentage of income servicing the mortgage, rather we examine the household budget, comparing the income with outgoings, including mortgage repayments and other commitments. Those in mortgage stress do not have sufficient free funds to pay their mortgage on time, without difficulty. You can read more about our definitions of mortgage stress here.

Looking at the summary analysis, the largest proportion of households who are borrowing and in mortgage stress reside in TAS and SA, then VIC, WA; all above the national average. QLD and NSW are below the average, along with NT.

Stress-Aug-2016---State-PCIn total there were 769,592 households nationally in stress. Looking at the number of households in stress by state however, NSW has the largest number with 244,119.

Stress-Aug-2016---State-NumberTurning to our household segments, those in the disadvantaged fringe and young growing family groups are the most strongly represented.

Stress-Aug-2016---SegmentBut, expressed as a percentage of segments in stress, young growing families are most exposed, with 41% in mortgage stress, slightly ahead of battling urban 36.7% and disadvantaged fringe 36%. Young affluent, stressed seniors and wealthy seniors were the least stressed.

Stress-Aug-2016---Segment-PC   Finally, here is the top 30 or so, nationally. The most stressed post code in Australia at the moment is 4350, Harristown, with more than 7,000 households in difficulty.  Note too that those at the top of the list are not necessarily as expected. Some older and more affluent segments are also being hit.

Stress-Aug-2016Next time we will look in more detail at some of the states, and discuss the underlying causes of mortgage stress. But for now, it is clear that mortgage stress is still a very significant economic factor.