Out And About In Wollongong

We recently posted Out and About in Wollongong featuring the Jolly Swagman, in which we examined the state of the local economy. The show was supported by some excellent research from Mitchell Grande, a recent Graduate of Politics, Philosophy, Economics (Honours) at the University of Wollongong – concerned with Australian public policy, and especially energy policy. Today we provide additional context from his research.

His research involved three interviews across different professions, renamed for anonymity: Interviewee A, a former Development Assessment Officer in Wollongong for many years; Interviewee B, a non-governmental organisation Project Officer operating within Crown St Mall; and Interviewee C, an Economic Development Officer with the Council.

Behind these interviews is the background story of Wollongong after the turn of the century. Pioneered by rezoning of Wollongong’s inner-city industrial land, in favour of mixed-use residential developments or shop-top housing, there has been a profound shift in the local economic and labour market landscapes. Noticeably from our video, there is a lot of development reinforced by lots of Council strategies. In times like these, it’s worth getting on to the street to see behind the data and progress – and what we found was interesting: things are bad, but things are better.

Interviewee A spoke of the 2009 changes in the Local Environmental Plans (LEPs), which swung heavily toward shop-top development, including the removal of height restrictions to quite unreal limits. In their time, they approved four 10 to 30+ storey buildings in Wollongong Central Business District (CBD), and particularly around Wollongong Station – but few if any have come to fruition, due to the global financial crisis and also the poor planning-related features of ‘the Dead Zone.’ As we saw, this area had confusing commercial mixes like pawn shops and money stores, services and real estate agencies, as well as a mix of poor parking and daggy takeaways. Being the main in/out ramp of the station, foot traffic isn’t an issue – it’s just all heading somewhere else. 

The 2009 LEP changes led to a major imbalance for local development, focusing on maximising residential construction and returns. Most of all, the LEP held a “very confusing and convoluted floor space ratio (FSR)” which favours commercial space but “which ‘Gong developers shy away from.” Interviewee A, here, spoke to the uniformity of FSR as a state-wide number given by the Department of Planning. This, not rates, is one major reason for vacancies. These kind of planning controls have steered local cities into densification, gentrification, and an expanding zone of unaffordability through urban sprawl, visualised by ghost shops.

After walking a few blocks toward the mall, noticeable changes in both vibrancy and vacancy were apparent. More services, notably health and wellbeing, as well as massage parlours and more cheap loans shops (for every one of those there was a couple more vacancies). A diverse street, for sure. But whether these are real drivers of economic growth, value creation, or just inelastic goods and services is implicit. Among all else, this type of job mix reinforces underemployment and poor wage conditions for the city.

The area between the Mall and the Dead Zone is hindered by the de-integration between these areas and the Hospital, having little draw in value and liveliness. As well, high running costs, high rents, low retail spending, and rising mortgage stress… these businesses would be betting heavily on new demand from the towers being built behind it. The story of de-integration between these areas is synonymous with the entire Wollongong local government area – albeit a much larger story – disjointed between education, health, metro, and recreation precincts.

For Interviewee B, the new retail segment of Crown St Mall has been chancy. It serves its purpose as a hub for, say, going to Chemist Warehouse or JB Hi-Fi, as well as having a food court and strip of restaurants – where most, if not all, are either chains, franchises, or commonplace brand names. This section has dramatically shifted the CBD’s centre of gravity, with rare if any vacancies appealing to consumers. Foot traffic is strictly to the centre (or the Mall), with people passing by proximate eateries, bus stops, and many vacancies – whether these feet notice and buy from these surrounds is another question. Interviewee B spoke to the ability of chains and big box retailers to withstand higher rents and ‘cyclical’ lower sales than, say, the local butcher who stuck it tough across from Coles.

A city street

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Following a pitstop at Wollongong’s big box centre, we finally ventured down Crown St Mall. A perfect Spring day in the ‘Gong, with a foragers market spanning a third of the way. For a midday Friday, it was plenty bustling. But the ground floor and upstairs vacancies were pervasive, with one for sale or for lease every few stores. In particular, the diversity of the store fronts was fairly constrained to health services, global brands, banks and financial services, as well as the tried and true café/bar.

Interviewee B works in the space between government and landlords, seeking to fill Crown St Mall vacancies with ‘makers and creators’ until the landlord finds a apposite tenant. These makers and creators run on a continually renewing 30-day license, while the shopfront is still advertised as for lease. Although not very well showcased in the video, these spaces are filled with new ideas and tenants who are battling through the local economic shift from traditional retail models. For these tenants, rents remain high as much as turnover remains low: a recent fix of already poor consumption hampered by online shopping and buy-now-pay-later services. In short, it is important to keep the Mall vibrant with non-traditional stores but “no way can [makers and creators] step into Crown St Mall on a full rental lease…” averaging $1,500 per week. 

This form of short-term leasing is, in my opinion, successful insofar as it allows business who would otherwise shift into the ‘burbs a chance at establishing customers and proficiency in a pedestrian mall setting. It has successfully brought vibrancy to otherwise dingy spots of the Mall, like Globe Lane; an impressive growth story. The main question, in the long run, is the scheme’s sustainability and whether it can positively impact wages or the local economy through a surge in value added or productive activities. A very tall order.

A group of people walking down a street

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Toward the end of the pedestrian Mall, where the market had ceased, we stopped again. The pattern of financial services and vacancies continued. Beyond the Mall toward the beach, although not featured in the video, is an interesting few blocks of many independent takeaway joints (bars, cafes, burgers), public administration buildings, and spats of development. Of note, lots of recently built shop-top housing is sparingly filled with ground floor tenants and is adjacent to more under construction mixed-use buildings.

As spoken to in the outset, the LEP rezoning of the inner-city toward the mixed-use development model has severely jolted the labour market, favouring both services and residential construction over value-added or manufacturing businesses. The inner-city land which surrounds the mall once retained over 12,000 manufacturing jobs back in 2007-2008. Since, the sector has fallen to 6,000 employees (2017-2018). Importantly, this is a treble effect of rezoning pressuring SMEs out of the inner-city, as much as it is higher rents and growing specialisation of overseas low-wage competitors grounding out businesses.

Interviewee B has seen this all too often, especially along Crown St Mall. SMEs are highly leveraged in personal debt and burdened by cost of living pressures, reluctant to fully close and instead stay fraught with affordability. Because of this, in their experience, tried ideas leave but rarely relocate. And if they were to, it would be out of the inner-city over to Fairy Meadow or Corrimal.

Interviewee C was well aware of the loss of manufacturing jobs, reiterating the Council’s commitment to public and private investment into office space, framing the opportunity to tap into the services labour market. Equally, investment is being directed to ‘[meet] the demand of inner-city living’ with shop-top housing increasing by 1,500 dwellings over 2016-2021. But glaringly, “the profitability and investment return of residential development has far outweighed the commercial management of development, leaving very little room for management.” It is intended that current and future investment will positively serve the anchor tenants, which, on the one hand, should be true as long as local population grows, and sustainable businesses land a lease. Easily done, right? But as we know, the ever-present question of demand and the ability to match is very uncertain.

Interviewee A believes the transition from manufacturing (etc.) will continue ever onward toward a service-based economy. Through such, they foresee more sociocultural flight, more commercial shortfalls in transition, and more finance being tied into housing, rents and accommodation. To stave off the current ‘feel’ of the ‘Gong, they suggest, “either someone at UOW needs to create the next Google” or locals must have all their needs localised and accommodated, meaning minimal commute times for work or health related specialists.

Which brings us to Lang’s Corner, set to be a 10-or-so storey commercial office tower at the so-called end of the Mall. Interviewee C strongly affirmed the need for high-quality office space as a main driver of jobs growth. This goes with councils target of 1,050 jobs per annum until 2030, by retaining local skills and accommodating those shifting from Uni or primary industry, to become a ‘nationally significant city.’ Lang’s Corner is a part of “30,000 sqm of new commercial space, including 16,500 sqm of A-grade office space…” in the pipeline. Interviewee C then shared a number of reports which reaffirmed their position about the economic health and needs of Wollongong:

  • Knight Frank’s 2017 report said that Wollongong’s “A-Grade office vacancy rate currently measures 8.5% (from 74,626 sqm total A-Grade stock) …” citing that “vacancy will reduce significantly in early 2017 following the recent announcement that the SES will move to the former ATO building.”
  • And then in their 2018 report that “[at] 10.6%, Wollongong’s office vacancy rate is currently at its lowest level in five years, having declined from 11.2% in January 2017…” and that “Limited leasing options are causing rents to rise…” “…prompting the need for more office space in Wollongong to facilitate economic development.”
  • The 2019 Office Market Report, published by the Property Council of Australia, found that there is currently a shortage of office space in the city centre – a much smaller zone than Knight Frank’s. Here, “the vacancy rate for A-grade is low at just 1.4%.”
  • It was in that report that “Total vacancy decreased from 10.6 percent to 10.0 percent in the year to January 2019; The vacancy decrease was due to 2,518sqm of withdrawals; and Demand was negative with -1,387sqm of net absorption recorded”
  • A Herron Todd White report found commercial vacancies “flat”, however, held optimism going into 2020 due to a ‘recovering housing market’ and interest rate cuts which ‘should stimulate retail spending’.
  • This report also profiled Wollongong as having “Leasing conditions [which] have continued a long term trend of being static given above average vacancy rates and generally soft demand, while supply continues to be introduced to the market given the large number of mixed-use projects completed in the Wollongong CBD over recent times and with additional projects also being developed at present…”
  • But importantly “There is no upward pressure being placed on rental rates with conditions generally favouring tenants.” They claimed that buyer demand does exist, however, had not shone through in 2019.

Interviewee A rejects the need for more office space, rather “there is a good mix… it [demand] is just not really there.” As well, “the vibrancy and feel of the place [in comparison to, say, the Shire CBDs along the trainline] also isn’t there…” “it has its own feel.” Interviewee A then went on to warn that current population and consumer issues, as well as demand and ability issues, will maintain the commercial sprawl and only increase vacancies and intimidate overindebted SMEs.

It appears that the real surge behind this demand/shortage of office space/scarce supply-induced rents is largely due to the residential development imbalance, in that Council has been ‘all in’ on housing speculation for some time, now requiring mammoth investments into commercial/office space. The frankly obtuse ratio of residential to commercial floor space has reduced local labour market diversity (i.e. losing manufacturing and primary industry, gaining services and food) in opting for shop-top developments. It is now vital, for the sustainability of the region, to catch up.

At the close of the video, we stood beneath two new mixed-use towers of 22 storeys and 19 storeys, with another under construction down the road set to be 21 storeys. The main questions which stuck with Joe and Martin were how the ‘Gong would absorb this supply, especially given population growth of 0.8% and the current macroeconomic conditions. Given the trend in local rents and consumer spending, will the ground floors be leased? Because, as we have seen play out across Australia’s junior CBDs, vacancies in newly constructed mixed-use buildings have been ubiquitous, with high turnover of retailers going bust or relocating out of mixed-use buildings, just to be replaced by ‘essential’ services. It is locally apparent that landlords refuse to lower rents for non-service tenants, in order to protect their loan-to-value ratios and avoid bank repayments. 

It’s especially uncertain whether such an increase in residential supply will depress local prices, maintain the 2018 highs to maximise developers’ return, or be taken by domestic market, supposedly, upward. Council is fairly certain on developing more sooner, stylised by a great deal of high-rise development. At present, Wollongong has over 18 cranes: 8 were mixed-use residential (Parq on Flinders, Crownview Wollongong, Signature in Regent St, Avante in Rawson St, Skye Wollongong, Atchison St, and the Verge in Underwood St, Corrimal); 5 were residential (Loftus, Beatson and Church streets, The Village in Corrimal); 3 were commercial (Getaway, IMB Banks, Lang’s Corner); 2 at the University of Wollongong, and 1 day surgery at Urunga Parade. Local construction is at a high ­– only being beaten by Gold Coast with 29 cranes and Adelaide with 19 cranes on the infamous Crane Index.

Given the palpable feel of vacancies on the ground around these development cites, it seems that the area might soon be flooded with mixed-use and commercial space at a highly inopportune time in the market. It’s hard to tell whether the ground-level retail/commercial spaces of these under construction towers can actually be filled – let alone sustained – by their anchor tenants, or whether diverse business ideas (other than services or cafes) can be sustained. Again, this is a treble effect of local consumers preferring the brand name hard-top retailers, as well as online shopping and buy-now pay-later services, which eat away at the turnover needed to sustain the sticky high rents.

It seems we can only wait and see what will amount of the ‘Gong’s residential and commercial mix. Of course, the current lived reality in the local economy – slow income growth, high debt and mortgage stress, wobbly house prices, as well as a retail recession, high rents, and collapsed construction approvals – seems to imply one story, experience across Australia. While optimistic advocates of the ‘build it and they will come’ mantra seem to be telling us another.

DFA Updates Home Price Scenarios To March 2019

We have updated our home price and mortgage risk scenarios, based on our household surveys, and other data sources. While the risk from a global financial crisis is being pushed out temporally, as central banks do QE again, the risks of a local property crash continue to play out as expected.

As price falls pass 20%, the second order impacts on the economy also play in. We think a 20-30% fall in property values in the major markets is all but baked in now, with the risk still on the downside. The next leading indicator will be an uptick in the unemployment rate (in about 6 months time?)

We discussed the rationale for this analysis, which is driven from our Core Market Model in our live stream last night. We also answer a range of questions from viewers.

You can watch the edited edition.

Or the original live event, including the pre-show, and chat replay.

Live Pre-Show Starts here

Main Show Starts here 2

Harry Dent Webinar Link:

Discussing Home Price Dynamics – Live Event Recording

I recently ran our monthly YouTube live stream event, in which we discussed the trajectory of home prices, and why we expect more falls in the months ahead.

The event is available to watch on YouTube, complete with the chat room questions and answers in real-time.

You can learn more about the 60 Minutes segment I participated in, as well as the latest trends in lending, home prices and sales transactions.

The “killer slide” is this one:

The number of property transfers are way, way down, and not just in Sydney. This is based on ABS data released yesterday.

What makes up your credit report? Hint – it’s not what you think

Research from consumer education website, CreditSmart, has found that many of us hold misconceptions about what goes into our credit report, and what credit providers look for when checking a credit report.

The CreditSmart website is owned by the Australian Retail Credit Association (ARCA), which is the peak body for organisations involved in the disclosure, exchange and application of credit reporting data in Australia. ARCA’s members are the most significant credit providers including the four major banks, credit reporting bodies (CRBs), specialist consumer finance companies, and marketplace lenders. A list of companies that support the CreditSmart education campaign is listed below.

They say that almost nine in ten Australians (88%) understand that banks and lenders check their credit report when they apply for a loan or credit.

Mike Laing, CEO and Chairman of ARCA, which founded CreditSmart, said that, unfortunately, too many people in Australia misunderstand their credit report and the information it contains.

“Accessing credit is part of everyday life and yet alarmingly, most consumers are unaware of the information included in their credit report. Your credit report will influence whether your application for credit or a loan is approved as your credit report forms part of a credit provider’s assessment of your application for credit or a loan,” said Mr Laing.

The research, undertaken by YouGov Galaxy, was done ahead of the upcoming changes to the credit reporting system.  Known as comprehensive credit reporting (CCR), from July 2018, the four major banks will be required to share 50% of customers’ data with lenders, to ensure a complete picture.

What does my credit report include?

A huge 63% of Aussies believe how much money they make is included in their credit report. Further, 40% think the balance on their savings account is also on their credit report.

“Your income and bank balance isn’t included in your credit report. When you apply for credit or a loan, the lender will ask you about your income, expenses and your financial assets, as all of this is taken into consideration, but it will not come from your credit report.

“You could have a lot of savings in the bank, but a bad credit report because you were careless about paying your financial accounts on time”, said Mr Laing.

Separately, more than half of Australians believe that gender and marital status are included in their credit report, and one-third think that their place of birth and car insurance claims are also shown. All of these are incorrect.

A further 63% of consumers thought their credit report already shows whether or not they make their monthly credit card and loan payments on time. This is a change that is only starting to happen now as part of CCR.

According to CreditSmart, a credit report is made up of:

  1. Identifying information (e.g. name, address, date of birth, employment and driver’s licence number)
  2. Information about the credit accounts you have and, for credit cards, personal loans, mortgages or car loans, your repayment history on these accounts over the last two years
  3. Credit applications over the last five years
  4. Default information (if any) over the last five years (payments at least 60 days overdue)
  5. Personal insolvency information and serious credit infringements (if any) for up to seven years

Who can access my credit report?

While most of us know that a bank or lender will look at our credit report when we apply for a loan, many are unaware that our credit report can be checked when we apply to open a new gas or electricity account (46%) or contract a mobile phone (46%).

“Most credit providers, which can include gas, electricity and phone providers, will carry out a credit check to find out how you’ve handled your debts in the past – something to keep in mind,” said Mr Laing.

Your credit report can’t be accessed when you apply for a job or take out or make a claim on insurance, which is not well known by Australians.

According to CreditSmart, your credit report will likely be requested from a credit reporting body by a credit provider when you:

  1. Apply for a loan from a bank (or any other finance provider)
  2. Apply for a store card (e.g. when you buy a TV on interest free finance)
  3. Rent items like a TV, fridge or computer, but not home rental
  4. Apply for a car loan
  5. Buy a mobile phone on a post-paid mobile plan
  6. Sign up for a phone, gas or electricity account

Checking your credit report frequently

Mr Laing stresses the importance of checking your credit report annually.

“A popular misconception is that checking your credit report can negatively impact your credit score, but that is not true. As a security measure your credit report will show who has looked at your credit report, including you, but this is done to protect your privacy and is not shown to a credit provider when you apply for a loan.

“Every consumer should check their credit report annually. Monitoring your credit health regularly – like your physical health – lets you confirm you’re managing your credit well and are able to access credit when you need to,” concluded Mr Laing.

For more information on how to get your free credit reports, and to understand what is on them or fix any errors, consumers should go to http://www.creditsmart.org.au website, set up by credit experts to provide clear information on the credit reporting system to assist consumers to optimise their credit health.

Companies that support the CreditSmart education campaign include:

ANZ
Bankwest
Bendigo and Adelaide Bank/ Delphi Bank
BOQ
Citi
Commonwealth Bank
Compuscan
Credit Savvy
Credit Simple
CUA
Customs Bank
Experian
Firefighters Mutual
Bank/Teachers Mutual Bank
Genworth
GetCreditScore
Good Shepherd Microfinance
HSBC
Keypoint Law
Macquarie
ME Bank
MoneyMe
MoneyPlace
NAB
Now Finance
Pepper Money
Police Bank
QBE
SocietyOne
Suncorp
Toyota Finance/Hino Financial Services/Lexus Financial Services/Power Torque Financial Services
Unibank
Westpac/ Bank of Melbourne/ BankSA/ StGeorge/ RAMS

 

DFA Launches Podcast Service

We continue to build out the Digital Finance Analytics social media strategy with the launch of our new podcast service. We have made the first post today, an audio version of the latest property imperative weekly.

We will add additional programmes as we progress, including some exclusive content.

You can subscribe to the RSS service, or via iTunes or other podcast delivery platforms.

The service is hosted at Castos

Mortgage Stress Feb 2018, Refinancing Helps, But Still Higher

Digital Finance Analytics (DFA) has released the February 2018 mortgage stress and default analysis update. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Across Australia, more than 924,500 households are estimated to be now in mortgage stress (last month 924,000). This equates to 29.8% of households. In addition, more than 21,000 of these are in severe stress, up 1,000 from last month. We estimate that more than 55,000 households risk 30-day default in the next 12 months, up 5,000 from last month.

We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA are higher at 4.9 basis points. Some households continue to benefit from refinancing to cheaper owner occupied loans, giving them a little more wriggle room in terms of cash flow. The typical transaction has saved up to 45 basis points or $187 each month on a $500,000 repayment mortgage. Enough to make a real difference.

Martin North, Principal of Digital Finance Analytics said “the number of households impacted are economically significant, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at two to three times income. This is not sustainable and we are expecting lending growth to continue to moderate in the months ahead”. The latest household debt to income ratio is now at a record, if revised 188.4.[1]

In our report last month, Gill North, a professor of law at Deakin University and a DFA Principal, indicated that “when external conditions in Australia deteriorate and or levels of financial stress and loan defaults rise acutely, a wave of responsible lending actions seems inevitable.”

Last week, the findings of an important case imitated by the Australian Securities and Investments Commission (ASIC) against the ANZ banking group were published: Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited [2018] FCA 155. ANZ was found to have breached its responsible lending obligations when providing car loans through its former car finance business, Esanda, and was ordered to pay a civil penalty of $5 million. The legal principles established in this case are broadly relevant, as all credit assistance providers (including brokers) and credit providers are subject to responsible lending obligations.

The Court found that in respect of 12 car loan applications from three brokers, ANZ failed to take reasonable steps to verify the income of the consumer because it relied solely on consumer payslips provided by the loan broker in circumstances where ANZ:

  • knew that payslips were a type of document that was easily falsified;
  • received the document from a broker who sent the loan application to Esanda; and
  • had reason to doubt the reliability of information received from that broker;
  • income is one of the most important parts of information about the consumer’s financial situation in the assessment of unsuitability, as it will govern the consumer’s ability to repay the loan;
  • while ANZ did not completely fail to take steps to verify the consumers’ financial situation, it inappropriately relied entirely on payslips received from these brokers; and
  • ANZ management did not ensure that relevant policies were complied with and, in the case of the contraventions involving one broker, no action was taken despite management personnel having become aware of the issues about the broker.

ANZ will be remediating approximately 320 car loan customers for loans taken out through the three broker businesses from 2013 to 2015 which are likely to have been affected by fraud. ASIC has separately taken action against the broker businesses that were involved in submitting false documents to ANZ.

Gill and a co-author (Associate Professor Therese Wilson from the law school at Griffiths University) have just had a paper entitled “Supervision of the Responsible Lending Regimes: Theory, Evidence, Analysis & Reforms” accepted for publication by the prestigious and highly ranked journal of the ANU University, the Federal Law Review. This co-authored paper includes an empirical study and analysis on the responsible lending actions taken by ASIC between 2014 and mid-2017.

Finally, Gill commends the Financial Services Royal Commission for its initial focus on consumer credit related misconduct and “predicts that consumer credit will be at the heart of the next significant banking scandal or financial crisis in Australia.”

Standing back, risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved. This is a significant sleeping problem and the risks in the system are higher than many recognise.

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end February 2018. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. They may or may not have access to other available assets, and some have paid ahead, but households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home.  Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

The forces which are lifting mortgage stress levels remain largely the same. In cash flow terms, we see households having to cope with rising living costs – notably child care, school fees and fuel – whilst real incomes continue to fall and underemployment remains high. Households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, but now prices are slipping. While mortgage rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises.  We expect some upward pressure on real mortgage rates in the next year as international funding pressures mount, a potential for local rate rises and margin pressure on the banks.

Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes.  Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households, contrary to the popular belief that affluent households are well protected.

Stress by The Numbers.

Regional analysis shows that NSW has 260,830 households in stress (254,343 last month), VIC 249,192 (254,028 last month), QLD 165,344 (158,534 last month) and WA has 130,068 (125,994 last month). The probability of default over the next 12 months rose, with around 10,373 in WA, around 10,200 in QLD, 13,929 in VIC and 14,764 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($978 million) from Owner Occupied Borrowers, which equates to 2.16 and 2.76 basis points respectively. Losses are likely to be highest in WA at 4.9 basis points, which equates to $669 million from Owner Occupied borrowers.

Here are the top post codes sorted by the highest number of households in mortgage stress.

[1] RBA E2 Household Finances – Selected Ratios September 2017 (Revised 2nd Feb 2018). The Bank has recently restated these ratios, taking them on average 10 points lower.

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Note that the detailed results from our surveys and analysis are made available to our paying clients.

Households Under The Mortgage Stress Gun In December

Digital Finance Analytics has released the December mortgage stress and default analysis update. Across Australia, more than 921,000 households are estimated to be now in mortgage stress (last month 913,000). This equates to 29.7% of households. In addition, more than 24,000 of these in severe stress, up 3,000 from last month. We estimate that more than 52,000 households risk 30-day default in the next 12 months, similar to last month. We expect bank portfolio losses to be around 2.8 basis points, though with losses in WA rising to 4.9 basis points. Households in NSW are showing the most significant rise in stress, thanks to larger mortgages relative to income, while income growth is slow.

Martin North, Principal of Digital Finance Analytics said “the number of households impacted are economically significant, especially as household debt continues to climb to new record levels. Mortgage lending is still growing at three times income. This is not sustainable”. The latest household debt to income ratio is now at a record 199.7.[1]

Risks in the system continue to rise, and while recent strengthening of lending standards will help protect new borrowers, there are many households currently holding loans which would not now be approved. This is a significant sleeping problem and the risks in the system are higher than many recognise.

Our analysis uses the DFA core market model which combines information from our 52,000 household surveys, public data from the RBA, ABS and APRA; and private data from lenders and aggregators. The data is current to end December 2017. We analyse household cash flow based on real incomes, outgoings and mortgage repayments, rather than using an arbitrary 30% of income.

Households are defined as “stressed” when net income (or cash flow) does not cover ongoing costs. Households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income. In both cases, households manage this deficit by cutting back on spending, putting more on credit cards and seeking to refinance, restructure or sell their home.  Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

The forces which are lifting mortgage stress levels remain largely the same. In cash flow terms, we see households having to cope with rising living costs whilst real incomes continue to fall and underemployment remains high. Households have larger mortgages, thanks to the strong rise in home prices, especially in the main eastern state centres, but now there are signs prices are slipping. While mortgage rates remain quite low for owner occupied borrowers, those with interest only loans or investment loans have seen significant rises.  We expect some upward pressure on real mortgage rates in the next year as international funding pressures mount, a potential for local rate rises and margin pressure on the banks.

Probability of default extends our mortgage stress analysis by overlaying economic indicators such as employment, future wage growth and cpi changes.  Our Core Market Model also examines the potential of portfolio risk of loss in basis point and value terms. Losses are likely to be higher among more affluent households.

Stress by The Numbers.

Regional analysis shows that NSW has 258,572 households in stress (251,576 last month), VIC 254,485 (253,248 last month), QLD 156,097 (157,019 last month) and WA 121,934 (123,849 last month). The probability of default rose, with around 9,800 in WA, around 9,500 in QLD, 13,000 in VIC and 14,000 in NSW.

The largest financial losses relating to bank write-offs reside in NSW ($1.3 billion) from Owner Occupied borrowers) and VIC ($957 million) from Owner Occupied Borrowers, which equates to 2.1 and 2.7 basis points respectively. Losses are likely to be highest in WA at 4.9 basis points, which equates to $682 million from Owner Occupied borrowers.

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Note that the detailed results from our surveys and analysis are made available to our paying clients.

[1] RBA E2 Household Finances – Selected Ratios September 2017

Our Most Popular Posts of 2017

As we tie the ribbons on 2017, here are the top 10 most popular posts from the DFA Blog throughout the past year.

Mortgage stress and the property market were to most visited, but Fintech innovation and household finances also featured.  The ABC Four Corners programme generated the most traffic to our site in a single day. Our earlier research on consumer debt continued to rate very highly.

The Definitive Guide To Our Latest Mortgage Stress Research

October Mortgage Stress Higher Again – See The Top 10 Post Codes

Tic:Toc launches with 22-minute home loan

Mounting concerns over Australian housing bubble

Safe as Houses? Not if You Live in Australia

ABC Four Corners Does Mortgage Stress

6 astonishing features of Australia’s current house price boom

Where Do Consumers Fit in the Fintech Stack?

Digital Finance Analytics – Quenching The Thirst For Accurate Household Mortgage Data

The Stressed Household Finance Report 2015 is Available

Our Top Reports Released In 2017

As we tie the ribbons on 2017, here are our most popular reports from 2017, all of which are still available free on request.

The Property Imperative Volume 9 Report Released Today

Time For “Digital First” – The Quiet Revolution Report Vol 3 Released

DFA’s SME Report 2017 Released

 

Latest Survey Results Are In – The Great Property Rotation Is On

Digital Finance Analytics has completed the analysis of our latest household surveys, to December 2017. We see some significant shifts in sentiment, which we will discuss in more detail over the next few days. These results will inform our option of likely developments in 2018. But here is a summary.

  • First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
  • Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
  • Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate.
  • Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

Here are some summary slides. We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, which could have a profound impact on the market. Those seeking to Trade Up are most positive of future capital growth.

First time buyers remain the most committed to saving for a deposit, while those who desire to buy, but cannot are saving less.

We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. We will explore the reasons for this change in a later post.

As a result, the proportion of investors expecting to transact in the next year has fallen. In fact, only Down Traders are slightly more likely to purchase than last time.

Finally, for today, we see minor changes in the intention to use a mortgage broker.

We continue to see a pattern where those seeking to refinance, and first time buyers are most likely to turn to a broker. Some other segments are less likely to use the channel to obtain a loan.

Next time we will look in more detail at the segment specific data. But we can certainly say there is strong evidence now that the property market is rotating, away from investors, and towards owner occupied borrowers.  There will be consequences for the market.