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.

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Housing affordability on governments’ agenda

From The Real Estate Conversation.

Gladys Berejiklian and Malcolm Turnbull’s governments are seeking solutions to the housing affordability problem.

Both new New South Wales premier Gladys Berejiklian and prime minister Malcolm Turnbull have put housing affordability firmly on their agenda.

With Domain’s latest price report showing the national median house price soared 7.7% to $781,000 in the year to December 2016, and apartments prices soared 3.4% to $546,000, housing affordability has been flung back into the spotlight.

Though the picture varies across the country – Darwin house prices fell 10.5% in the year to December, and Perth prices were down 2.3% according to the Domain report – there are pockets of Australia where it is now well beyond the reach of average wage earners to buy their own home

Berejiklian told ABC News last night, when asked if she would consider abolishing stamp duty, “We’re certainly looking at all options.” She emphasised that supply had already increased under the current NSW government.

She said, “I want to make sure the average person doesn’t feel owning their own home is out of their reach,” saying she wanted to make is easy for residents to buy their first home.

Malcolm Turnbull has also turned his attention to housing affordability, with treasurer Scott Morrison in London to look at how Britain has enabled more people to buy their own home. Turnbull also last week appointed Victorian MP Michael Sukkar as Assistant Minister to the Treasurer with the main responsibility of addressing housing affordability.

The Definitive Guide To Our Latest Mortgage Stress Research

We have had an avalanche of requests for further information about our monthly mortgage stress research which is published as a series of blog posts plus coverage in the media, including Four Corners. Here is the timeline of recent posts, which together provides a comprehensive view of the work.

Top 10 Mortgage Stress Count Down – September 2017

More than 30,000 of the nation’s ‘richest’ households in financial distress

Mortgage Stress Still On The Up

ABC Four Corners Does Mortgage Stress

Mortgage Stress Gets Worse in July

Mortgage Stress Grinds Higher In June

Australians Curb Spending as Household Debt Balloons

Mortgage Stress Accelerates Further In May

What The Mortgage Stress Data Tells Us

Mortgage Stress And Default Probability Rise Again In April

Record numbers under mortgage stress

Mortgage Stress Analysis Using the DFA Market Model

Seven News Melbourne Does Mortgage Stress

Nine News Does Mortgage Stress

This will all be rolled up into our next Property Imperative Report, to be published in a couple of months.

Note that a number of people went to our 2015 report – The Stressed Household Finance Landscape, which looks at households and their use of small amount credit contracts, a.k.a. payday lending. This is a separate stream of work.

So Where Will The Property Market Go In 2017?

Mortgage Stress And Probability Of Default Is Rising

Mortgage Stress Covers 18.5% Of Book Value

A Segmented View Of Mortgage Stress and Default

Top 20 Postcodes For Mortgage Stress Across Australia

New DFA Video Blog – Household Mortgage Stress and Defaults

The Full 100 Mortgage Stress Listing

Mortgage Default Heat Map Predictions

Channel Nine News Does House Prices and Mortgage Defaults

Affluent suburbs feel heat from rising property costs

ABC News 24 Does Affluent Mortgage Stress

A Cumulative View Of Mortgage Rate Sensitivity

One in five homeowners will struggle with rate rise of less than 0.5%

Home loan rates heading higher as funding costs rise, competition eases

ABC News 24 Does Household Mortgage Rate Sensitivity

Mortgage Stress Grinds Higher

More than 1 million Australians face mortgage strife

Latest Greater Sydney Mortgage Stress Mapping

Latest Greater Brisbane Mortgage Stress Mapping

Latest Greater Melbourne Mortgage Stress Mapping

Latest Greater Perth Mortgage Stress Mapping

Mortgage Stress Rises Again

Getting To Grips With Mortgage Stress

Tracing The Rise Of Mortgage Stress

Latest On Victorian Mortgage Stress

Check out our media coverage.




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.