Exclusive analysis performed for AFR Weekend has revealed that more than a million Australian home owners will struggle with mortgage stress if interest rates were to rise just three percentage points.
Data from research house Digital Finance Analytics shows that close to one in three households from Victoria, Tasmania and Western Australia will experience mortgage stress ranging from mild to severe in the event of just three rises of 25 basis points. A rise of 300 basis points, back to more normal levels, would be much more severe.
The news follows warnings from the OECD that the nation has a one in five chance of entering recession and Australia’s $6.5 trillion housing market is running the risk of a hard landing.
Runaway house prices in Melbourne and Sydney have added to the risks facing the economy as rising levels of household debt make home owners and property speculators vulnerable to unexpected moves in interest rates.
The Reserve Bank of Australia’s official cash rate, on which mortgage rates are based, is as an “emergency low” 1.5 per cent. In practice that means mortgage repayment rates are between about 4 per cent and 5 per cent of the loan amount per year.
Digital Financial Analytics principal Martin North says that a shake out in the property market would not be restricted to lower income areas and would include households in the trophy suburbs of Bondi and Lane Cove in Sydney as well as homes in the leafy green streets of Toorak and Prahran in Melbourne.
“The common theme here is affluent households paying top dollar for apartments with big mortgages and the potential to be caught out by rising interest rates and flat or falling incomes. Even places like the lower north shore are being hit” he said.
Under the modelling performed by Digital Finance Analytics, there are around 650,000 households in Australia experiencing some form of mortgage stress. The numbers are consistent with a Roy Morgan report from September 2016 that showed one in five households were experiencing mortgage stress.
The longstanding measure for mortgage stress has been 30 per cent of household income.
Mild mortgage stress might see household cut back on childcare expenses, dipping into savings or reaching for the credit card in order to make payments. Severe mortgage stress indicates that the mortgage holder has missed a payment or payments and is already considering selling the property.
If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.
Professor Roger Wilkins of the Melbourne Institute at the University of Melbourne produces the Household Income and Labour Dynamics Survey, regarded as one of the best sources of information about housing affordability in Australia.
He says that while mortgage stress hasn’t materially increased in recent years that a sharp rise in interest rates would be destructive to household finances everywhere.
“If the cash rate goes to 6 per cent then you would expect to see a lot people in strife. Particularly with wage growth and inflation at such low levels so that does increase vulnerability to rises to interest rates” Mr Wilkins said.