More than 1 million Australians face mortgage strife

From The AFR.

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.

Mortgage Stress Grinds Higher

We have just rerun our mortgage stress models, incorporating data to 1st March 2017. Household budgets remain under pressure, thanks to flat incomes and rising living costs – and some lifts in mortgage rates. You can read more about our approach to measuring mortgage stress here. Our current analysis concentrates on owner occupied mortgages.

Overall, 21.78% of households are in some degree of mortgage stress. We look at mild stress, meaning they are managing to meet repayments, but are doing so by cutting back on other expenditure, putting more on credit cards, and seeking to refinance or restructure to reduce monthly payments.  19.08% of households fall into this group. An additional 2.7% of households are in severe stress, meaning they are likely to miss repayments, or are in default, or are looking to sell. We look at household cash flow, not a set percentage of income going on the mortgage.

Here are the postcodes across Australia with the highest levels of stress.

Harristown, QLD 4350, which was the highest count in December 2016, still is first, followed by Leumeah NSW 2560. Leumeah  is a suburb of Sydney, Macarthur/Camden, about 40 kms from the CBD.  The average age of the people in Leumeah is 35 years of age. Around 37% of households there have a home loan mortgage.

Third is Frankston VIC 3199, which is a suburb of Melbourne, Bayside, It is about 39 kms from Melbourne.  Frankston is in the federal electorate of Dunkley. The median/average age of the people in Frankston is 38 years of age. Around 30% of households here have a mortgage.

Fourth highest is Merriwa 6030, a suburb of South Western, Heartlands, WA. It is about 35 kms from Perth in the electorate of Pearce. 41% of homes here are mortgaged.  The average age of the people in Merriwa is 35 years of age.

Once again, remember interest rates are very low, and are expected to rise, so the OECD warning about the risks in the housing sector seem well placed.

Editors Note. We updated this post to reflect the total of mild and stress, when it first appeared, we sorted only on mild stress, which changed the results slightly – and we also added back the latest probability of default metrics as well.

 

OECD Paints A Sanguine Picture Of The Australian Economy, Includes Housing Risks

The latest OECD Report – 2017 Economic Survey of Australia says whilst Australia’s economy has enjoyed considerable success in recent decades, the economy shares the global risk of a “low-growth trap”.

Living standards and well-being are generally high, though challenges remain in gender gaps and in greenhouse-gas emissions, and further challenges arise from population ageing.

Low interest rates have supported aggregate demand but are also ramping up risk-taking by investors and driving house prices and mortgage lending to historical highs.

A fall in house prices and or demand could have significant macroeconomic implications. Specifically, the market may not ease gently but develop into a rout on prices and demand with significant macroeconomic implications.

Macrofinancial indicators underline the threat from the housing market, with house prices and related indicators (house indebtedness, bank size), pointing to continued vulnerability. Any impact will most likely be through aggregate demand than financial instability.

They advocate tight macroprudential measures, improved housing supply, and reducing banks’ implicit guarantees by developing a loss absorbing and recapitalisation framework.

They support a cut in company tax, and an expansion of the GST, switching from transaction taxes (like stamp duty) to land taxes.

They say the economy is now rebalancing following the end of the commodity boom, supported by macroeconomic policies and currency depreciation. The strengthening non-mining sector is projected to support output growth of around 3% in 2018 and spur further reduction in the unemployment rate.

 

Improving competition and other framework conditions that influence the absorption and development of innovation are key for restoring productivity growth.

Innovation requires labour and capital markets that facilitate new business models. Productivity growth could be boosted through stronger collaboration between business and research sectors in R&D activity.

Australia’s adjustment to the end of the commodity boom has not been painless. Unemployment has risen, and there are increasing concerns about inequality.

In addition, large socioeconomic gaps between Australia’s indigenous community and the rest of the population remain. Developing innovation-related skills will be important for the underprivileged and those displaced by economic restructuring, and can help reduce gender wage gaps.

Externally, Australia, as always, is exposed to the vagaries of global commodity markets and this might include a renewed plunge in prices (or, positively, a strong resurgence). Australia’s iron ore production is among the lowest cost in the world and therefore comparatively insulated from such developments, however its coal sector is relatively more exposed as its production is distributed across the cost curve. Interaction of downside scenarios is likely to exacerbate the negative macroeconomic outcomes.

For instance, a negative external shock could lift unemployment sharply which would result in significant fall in consumption and rising mortgage stress and falling house prices. The economy is well positioned to handle shocks. The speed and strength of the rebalancing processes in response to the end of the commodity boom auger well for the economy’s shock-absorbing capacity. In addition, Australia has more reserve capacity for monetary and fiscal stimulus than many other OECD economies.

The slideshow is available here.

 

Choice Calls For Easier Credit Card Cancellation

Choice, the consumer group, has called for consumers to be able to cancel their credit cards immediately online, rather than jump through the hoops which the banks currently prescribe.

They recently reviewed the cancellation policies of the big four and found a distinct lack of easy cancellation options.

What? No online cancellation?

Instead of being able to cancel your card online and quickly cut ties with the debt monster, the banks force you to call, write a letter or visit a branch in person.

Meanwhile, almost all other banking services – including applying for a credit card and having it approved – are available online these days.

To us, it looks like a blatant attempt to keep you attached to your credit card and keep the debt clock rolling. That’s why we’ve been pushing to have the tactic abolished since August 2015.

Our review comes as the banks are set to face a Parliamentary Inquiry on Friday this week, and it follows attempts by ANZ and Westpac to ward off credit card criticism by promising to cut interest rates on some “low rate” cards.

Jumping through hoops

Here’s what the banks require if you want to cancel your credit card.

ANZ

  1. Call or write to ANZ.
  2. Return the card: “ANZ will only cancel the credit card when the account holder has returned it to ANZ cut diagonally in half (including any chip on the card) or has taken all reasonable steps to return it to ANZ”.
  3. Any additional funds will be returned by bank cheque.

NAB

  1. Call, write “or otherwise advise NAB in a manner acceptable to NAB”.
  2. Cut the card diagonally in half.
  3. Additional funds will be returned by bank cheque. NAB will charge its “usual fee” for issuing the cheque. Cash out is only available for amounts under $5.

Westpac

  1. Call, write or visit a Westpac branch.
  2. Promise to destroy the card.
  3. Additional funds are paid by bank cheque or directed into another account by direct debit.

CBA

No instructions are provided for card cancellations in the CBA credit card ‘conditions of use’ document. Customer service representatives instructed CHOICE to call the credit card team to cancel, which can only be contacted Monday to Friday, 9.00am–5.30pm.

Chasing fees and interest

“In the age of online banking if defies belief that ANZ, NAB, Westpac and Commonwealth all require you to call or email them when seeking to cancel a credit card,” says CHOICE head of campaigns and policy Erin Turner.

“It seems clear that the big banks’ ‘go slow’ on card cancellations is about protecting revenue from interest and fees, with data showing the big banks slug consumers with an average annual fee of $146 compared to just $58 through a mutual or customer-owned banks.

“Unfortunately, getting stuck paying excessive credit card interest is only one of the traps consumers face, with many of us paying excessive annual fees when we fail to cancel a card.”

The national collective credit card debt hovers at a staggering $32 billion or so at the moment (about $4300 per cardholder). If you’re one of those consumers who’ve gotten in over your head, it’s generally a good idea to cancel the offending card once you’ve climbed out of debt.

That would be doubly true if you happen to have a card from one of the big four banks: CBA, ANZ, NAB and Westpac. Their standard interest rates are among the highest. And their so-called low-interest cards aren’t that much better – or at least not better enough.

Expect Irresponsible Lending Complaints To Rise

From Australian Broker.

A number of consumer advocates have predicted that complaints about irresponsible lending by brokers will trend upwards in future.

Speaking to Australian Broker at the Responsible Lending and Borrowing Summit in Sydney, Alexandra Kelly, principal solicitor at the Financial Rights Legal Centre of NSW said that while she had not seen any evidence of a “systemic problem” with fraud in the broker channel at present, more consumer claims could emerge once rates start rising.

“We’re still in the stage where some consumers haven’t gotten into trouble yet so we’re not necessarily seeing any issues yet because interest rates are very low,” she said.

If interest rates did start rising however, some consumers would feel the pinch, lead them to wonder whether the information supplied by the broker in their loan application was entirely correct, and approach their nearest consumer advocacy group.

“We’ve seen some very tightly wound consumers,” Kelly said. “That’s going to be the issue when there’s an increase and their mortgages start rising.”

Gerard Brody, CEO of the Consumer Action Law Centre in Victoria, agreed that there was going to be a spike in complaints.

“I think that a lot of loans – particularly broker loans – are generally higher amounts,” he told Australian Broker. “They encourage people to get bigger properties and that stretches people if interest rates go up.”

An increase in consumer complaints as a result of rate increases in the future was realistic, he said.

However, he noted that the lenders could do more to fix this issue now.

“At the end of the day, the lender has also got the same responsible lending obligations when it comes to requirements objectives, enquiries about affordability, and verification.”

Risks In The Banks’ Property Investor Portfolio

In the world of microprudential, the status of individual households and their finances becomes ever more important from a risk perspective. We have already shown that some investment property holders are near to the edge, financially speaking, and would be troubled by rising interest rates or a forced conversion from interest only to interest and principle repayments.

The Basel Committee is pushing towards a requirement for banks’ to hold higher capital where the servicing of the loan is “materially dependent” on regular rental streams. Whilst this might seem arcane when the average vacancy rates are quite low, even now there are significant state variations.  Vacancy rates in WA in particular are high.

So using data from our extensive household surveys, we have been looking at the finances of property investors, with the question of servicing the loan in mind should rental streams dry up.

To do this we created a custom data series using the following logic.

We are looking at the available funds, on a cash flow basis after living costs, servicing the OO mortgage (if held) and tax.  Next we compared this to the costs of the investment property, again on a cash flow basis.

Looking across our household segments, the more affluent households are more likely to find their available funds would not cover the costs of the investment property (all done on an annual basis), whilst those with lower incomes, and who are less affluent are actually better positioned.

If we cut the data by our property segments, portfolio property investors have the highest exposure, followed by first time buyers.

Finally, we can look across the regions, and we find that property investors in Hobart are more exposed (though rental vacancies are lower there) but property investors in NSW also more highly exposed (thanks to larger mortgages compared to income).

This alternative way to view the market could become important if differential capital weightings were to be applied.  This could move from a theoretical discussion, to one of relative risk-based pricing down the track. Most lenders would not currently differentiate on this basis.  Granular data is required to look through this lens.

Household Debt Has Become An RBA Thematic

The statement delivered today by RBA Governor, Philip Lowe, to the House of Representatives Standing Committee on Economics contains the now familiar nod towards risks associated with high household debt.  “Too much borrowing today can create problems for tomorrow, because debt does have to be repaid”. Exactly!

One area that we are watching closely is the cycle in residential construction activity, as the upswing has helped support the economy over recent years. The rate of new building approvals has slowed, but there is a large amount of work still in the pipeline, particularly for apartments, so we still expect some further growth in this part of the economy this year. There has, however, been some tightening in conditions for property developers in some markets.

In the broader housing market, the picture remains quite complicated. There is not a single story across the country. In parts of the country that have been adjusting to the downswing in mining investment or where there have been big increases in supply of apartments, housing prices have declined. In other parts, where the economy has been stronger and the supply-side has had trouble keeping up with strong population growth, housing prices are still rising quickly. In most areas, growth in rents is low. And recently we have seen a pick-up in growth in credit to investors, which needs to be watched carefully.

In terms of consumer prices, a year ago we had expected the inflation rate to remain above 2 per cent. It has turned out to be lower than this last year, at around 1½ per cent. Wage growth has been quite subdued, reflecting spare capacity in the labour market and the adjustment to the unwinding of the mining investment boom. We anticipate the subdued outcomes to continue for a while yet. Increased competition in retailing is also having an effect on prices, as is the low rate of increase in rents.

We do not expect the rate of inflation to fall further. Our judgement is that there are reasonable prospects for inflation to rise towards the middle of the target over time. The recent improvement in the global economy provides some extra assurance on this front. Headline inflation is expected to be back above 2 per cent later this year, boosted by higher prices for petrol and tobacco. The pick-up in underlying inflation is expected to be more gradual.

Since we appeared before this Committee last September, the Reserve Bank Board has kept the cash rate unchanged at 1.5 per cent.

At its recent meetings the Board has been paying close attention to the outlook for inflation as well as two other issues: trends in household borrowing and in the labour market.

One of the ways in which monetary policy works is to make it easier for people to borrow and spend. But there is a balance to be struck. Too much borrowing today can create problems for tomorrow, because debt does have to be repaid. At the moment, most households with borrowings do seem to be coping pretty well. But the current high level of debt, combined with low nominal income growth, is affecting the appetite of households to spend, and we are seeing some evidence of this in the consumption figures. The balance that is required is to support spending in the economy today while avoiding creating fragilities in household balance sheets that could cause problems for the economy later on. This is also something we need to watch carefully.

Trends in the labour market are also important. As in the housing market, the picture in the labour market varies significantly around the country. Overall, the unemployment rate has been steady now for a little over a year at around 5¾ per cent. In a historical context this would have been considered a good outcome, although, today, a sustainably lower unemployment rate should be possible in Australia. The other aspect of the labour market that is worth noting is the continuing trend towards part-time employment. Over the past year, all the growth in employment is accounted for by part-time jobs. There is a structural element to this, but it is also partly cyclical. We expect that the unemployment rate will remain around its current level for a while yet.

The Reserve Bank Board continues to balance these various issues within the framework of our flexible medium-term inflation target, which aims to achieve an average rate of inflation over time of 2 point something. Our judgement is that the current setting of the cash rate is consistent with both this and achieving sustainable growth in our economy. We will continue to review that judgement at future meetings.

Canada Vs Australia On Housing

The RBA Governor gave a speech comparing aspects of the Australian and Canadian economies. I found the comparisons relating to housing interesting. In summary, high prices, high debt, and high risk.

We have both had strong housing markets over recent years and there are concerns about the level of household indebtedness. There are some similarities in the factors at work.

One is that our populations have been growing quickly for advanced industrialised countries. In Australia, population growth has averaged 1.7 per cent over the past decade, while in Canada it has averaged 1.1 per cent. Over the past couple of years the growth rates have moved closer together.
Graph 4: Population Growth

Another similarity is that there has been strong demand from overseas residents for investments in residential property, particularly in our wonderful Pacific-rim cities. Not only are these cities attractive places to live, but we also offer investors security of property rights and economic and financial stability. Given the strong demand and its impact on prices in some areas, some state and provincial governments have recently levied additional taxes on foreign investors in residential property.

Our housing markets have also been affected by the global monetary environment. We both run independent monetary policies, but the level of our interest rates is influenced by what happens elsewhere in the world. With interest rates so low and our economies being resilient, it is not so surprising that people have found it an attractive time to borrow to buy housing.

Graph 5: Housing Price Growth

Another characteristic that we have in common is that at a time of strong demand from both residents and non-residents, there are challenges on the supply side. I understand that zoning is an issue in Canada, just as in Australia. In some parts of Australia, there has also been underinvestment in transport infrastructure, which has limited the supply of well-located land at a time when demand for such land has been growing quickly. The result is higher prices.

We are also both experiencing large differences across the various sub-markets within our countries. The strength in housing markets in our major cities contrasts with marked weakness in the mining regions following the end of the mining investment boom.

Graph 6: Housing Price Growth by City

The increase in overall housing prices in both our countries has gone hand in hand with a further pick-up in household indebtedness. In both countries the ratio of household debt to income is at a record high, although the low level of interest rates means that the debt-servicing burdens are not that high at the moment.

Graph 7: Household Debt-to-income Ratio

In Australia, the household sector is coping reasonably well with the high levels of debt. But there are some signs that debt levels are affecting household spending. In aggregate, households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination.

Reflecting this, our latest forecasts were prepared on the basis that growth in consumption was unlikely to run ahead of growth in household income over the next couple of years; in other words the household saving rate was likely to remain constant. This is a bit different from recent years, over which the saving rate had trended down slowly.

Graph 8: Household Savings Ratio

This interaction between consumption, saving and borrowing for housing is a significant issue and one that I know both central banks are watching carefully. It is one of the key uncertainties around our central scenario for the Australian economy. It was also cited as one of the key risks for the inflation outlook in the Bank of Canada’s latest Monetary Policy Report. We are still learning how households respond to higher debt levels and lower nominal income growth.

 

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?