Mortgage Stress Higher In February 2021

Well, against expectations – based on the main thrust of economic news (and spin), some may find it surprising to learn that our latest household surveys detected a RISE in Mortgage stress in February, based on our 52,000 or 0.5% rolling sample.

Remember that we are measuring free cash flow, and a range of factors have driven the rate higher. First, people are spending harder now, and draining their savings (some built large buffers last year). Second the number of people on principal and interest rate holidays from the banks has fallen as they restart some (any) sort of repayments, (which of course resets the default “timer”, conveniently). Third, more are weaning off JobKeeper, and payment rates on JobSeeker are dropping as the extra support is withdrawn. Finally, some have negotiated new loans, at lower rates, but others are not successful in this, due to credit history, or taking a larger loan. Support ends at the end of March, so expect to see more of this ahead.

And the snap lock-downs had a big impact on some incomes, which are growing only slowly, if at all.

It is worth remembering that some new loans are being made at up to eight times income – this is a very high multiple even in the current low rate environment. And rates may not be as low for as long as many currently expect!

Thus overall mortgage stress rose from around 39% last month to more than 41% this month.

Across the country, more than 1.5 million mortgage holders have cash flow issues, this is 41.8% of borrowers. Tasmania and NT had the highest proportion of households exposed, and Victoria rose to 45.4% in response to the recent lock-down.

We also measure rental stress, which is 34.9% of renters, investment property stress at 26.5%, and overall aggregate financial stress at 38%. In total around 4 million households are being crunched in some way.

Across the segments, young growing families, and those on the urban fringe are most exposed (this includes many recent first time buyers), while more affluent households are also caught, thanks often to multiple investment properties.

We can identify the top post codes for our four stress types, sorted by the number of households exposed. We see the same post codes appearing in multiple lists. There was a significant rise in the high growth areas around Melbourne, as well as Toowoomba in Queensland, and areas of New South Wales.

Underlying our modelling are our scenarios, which we have updated with the latest economic data inputs. There is a greater probability of home price rises, especially in some smaller states, and in the house, not high-rise unit segment.

And we discussed this analysis, together with the stress maps which accompany it in our recent live show.

Whilst some are falling over themselves to get into the market, we remain cautious, given the potential rise in stress, mortgage rates, and the tapering of Government support.

Mortgage Stress Falls In January

The latest results from our household surveys reveals that by the end of January 2021, overall levels of mortgage stress dropped below 40%, to 39.5% – still well above the level prior to the virus hitting.

This is a consequence of lower mortgage rates following the RBA cash rate cuts, liquidity support and quantitative easing, plus less impact from the virus on lock-downs and employment. That said, whilst many households have grown their savings buffers, a considerable number remain close to the edge, in cash-flow terms. More than 1.4 million mortgaged households remain under pressure

Across the states, mortgage stress fell significantly in VIC, but remains highest in TAS. Rental stress is still elevated, with NSW and ACT having the most significant issues, while property investor stress in also highest in ACT and NSW, thanks to falling returns from rents, and rising vacancy rates in some areas. As a result many property investors are considering selling into the autumn market rise.

Levels of stress vary across our household segments, with many living on the urban fringe in the high-growth corridors still under pressure. A considerable number of more affluent households, often holding multiple investment properties are also under pressure. Young Growing Families, which include many First Time Buyers remain stretched, with overall Financial Stress (an aggregate of mortgage, rental and investor stress) are the most stressed.

Looking at specific post codes – mortgage stress is highest (by count of households) in Narre Warren 3805, Cambelltown (2560) and Tapping/Wanneroo (6065). All high growth corridors.

Rental stress is highest in central Melbourne (3000), Cambelltown (2560) and Liverpool (2170). Much of the pressure is from high-rise occupants, as well as in the high growth corridors.

Property investor stress is highest in Surfers Paradise (4217) where tourism is well down, Central Melbourne (3000) and Northern Beaches (2099).

Finally, overall financial stress, our aggregate measure is highest in Cambelltown (2560), Liverpool (2170), Toowoomba (4350) and Central Melbourne (3000).

We discussed this data in detail on our live show last night.

We also updated our scenarios, reflecting the more positive economic news – though retain alternatives where the virus remains less contained. The path of the virus, and its control is clearly directly linked with economic performance and the trajectory of mortgage stress, and home prices ahead.

Mortgage Stress Accelerates In November 2020

This was not meant to happen – after all the official story is we are in recovery mode – yet the latest results from our rolling household surveys tells another story as unemployment and underemployment rise further, even as Government financial support is tapered down. As a result mortgage stress – those households with a mortgage and cash flow pressures – rose to an astonishing 41.6% in November. Before the pandemic we sat at 32.9% in February, so nearly 10% more households are now feeling the pain.

The surveys showed some mixed drivers of this result. Sure, a number of larger firms have come off JobKeeper as the economy reopenes but more smaller firms are putting people on JobKeeper, even as the level of support is reduced. This was confirmed by the segmental analysis of the latest payroll data which showed growth among larger firms but a fall among smaller firms.

More households have had to recommence mortgage repayments now, with the ABA reporting that among the top 7 largest banks, deferred loans dropped from a peak of $250 billion down to $86 billion in November, with home loan deferrals by the seven largest banks are down to fewer than 145,000. But this has placed considerable pressures on households recommencing, even as unemployment continues to rise – to 7% in November according to the ABS and remember this is artificially understating the true picture as JobKeeper recipients are excluded.

The unemployment rate increased 0.1 pts to 7.0% (1.7 pts higher than a year ago)

Unemployment increased by 25,500 to 960,900 people (and increased by 238,900 over the year to October 2020)

The youth unemployment rate increased 1.0 pts to 15.6% (and increased by 3.1 pts over the year to October 2020)

Our analysis also examines Rental Stress, Property Investor Stress and overall Financial Stress by state and household segment.

Across the states, Tasmania still retains top mortgage stress spot in in percentage terms, followed by Victoria and Western Australia. Rental stress is highest in New South Wales and Victoria, and across Australia. On average 35.2% of those renting have cash flow issues. Among property investors, 25.6% reported a cash flow deficit, as rents fall, and vacancies rise. More are still considering selling – especially those holding high-rise apartments in Sydney and Melbourne.

Across our segments, mortgage stress is highest among young growing families, which includes many first time buyers who were attracted into the market by Government incentives. This will not end well. Those living in the high growth corridors are also under pressure, especially on the urban fringe. And we see more affluent households caught up in stress, thanks to higher levels of unemployment – and high leverage.

Rental stress is broad based, with many first generation migrants under pressure, as well as young affluent.

Many affluent households with investment property are stressed, thanks to the proliferation of multiple properties, and high leverage, even as rentals fall in some areas. Once again, units are most exposed.

Overall financial stress (an aggregate of the three elements we discussed) is broad based across our segments. This is a significant structural issues – and one which was already in play BEFORE the pandemic. But it is significantly worse now.

The top postcodes by mortgage, rental and investor stress are presented below. This data is sorted by the number of households impacted by stress (again in cash flow terms). We see high representation in high growth corridors across the country, as well as some inner City suburbs.

Investor postcodes show the location where the investor resides, not necessarily the location of their investment properties.

Overall financial stress is highest in the high growth corridors, areas where many households are under pressure, yet also areas where more development in under way and home land packages are being pushed very hard though the current Government schemes.

We also mapped the stress – here is an example of mortgage stress in Melbourne. This is to illustrate the patchwork nature of stress (orange and red are high stress areas).

Two final points, as Government support is wound back further, especially in the March quarter next year it seems likely stress will continue to bite, unless unemployment turns around faster than expected.

And as the ABA said recently

“Don’t wait till you are in over your head, talk to your bank, they’ll help you find a way through this. Don’t tough it out on your own”,

This is excellent advice, and should sound a note of caution to those who are considering a property move in the current environment. Mortgage stress can put considerable pressures on households, and often leads to a sale later. So new purchasers should be cautious, and develop their own cash-flows prior to committing – just because a lender agrees to make a loan, this does not necessarily mean its a sensible decision from a borrowers point of view – a bank has a completely different view of “risk”. So buyers beware!

FINAL REMINDER DFA Live Q&A Tonight 8pm Sydney – Latest Scenarios And Household Stress

Join us for a live Q&A as I discuss the latest results from our surveys and explore the impact at a post code level. You can ask a question live via the YouTube chat as we explore the latest economic data together. And yes, I will have my stress mapping and post code analytic engine online…

https://walktheworld.com.au/

Household Financial Stress Reaches New High

The results from our latest household surveys reveals that despite the return to work as the lock down is eased, the reduction in JobSeeker, JobKeeper and the need to renew mortgage payments are all offsetting the better job news, in a low income growth, high cost environment.

We also updated our property and finance scenarios to take account of the RBA announcements yesterday. There is still a path for higher property prices ahead, but this is not our central scenario over the next 2-3 years. Handling the virus will be a critical issue ahead.

We discussed this in detail on our live stream Q&A.

We measure stress in cash flow terms, recognising that households may have access to credit or savings in the short term, rather than a set proportion on a mortgage repayment. In addition we examine those renting, and those with investment property to give a more complete picture. Note our approach is different from those preferring to use a set percentage of income.

Mortgage stress rose to 40.6%. This is a new record.

Across the states, mortgage stress is most severe in Tasmania and Victoria, whereas rental stress is highest New South Wales. Investor stress is also highest in this state together with the ACT. Overall financial stress is highest in NSW and ACT, with VIC following closely behind.

Across the segments, young growing families (including many first time buyers are the most exposed to mortgage stress, whereas rental stress is hitting younger affluent, first generation migrants and older households. More affluent households are experiencing higher levels of property investor stress, as they are more leveraged, and often have multiple properties. In aggregate Financial stress is touching a wide range of our cohorts.

We present the top post codes (in terms of count) for each stress dimension.

And for the first time we have mapped aggregate financial stress for each major centre, highlighting that pressures on households are impacting a range of locations. Generally the high-growth corridors show significant issues, but even more established areas are also under pressure.

Our view is that we are still in the foothills of the financial crisis, and that as stimulus is withdrawn further, and unemployment continues to rise, stress will deteriorate.

September Stress Eases A Tad (But Still Close To Record High)

We have updated our Core Market Models and scenarios with the latest household financial stress data to the end of September 2020.

We discussed this in our live show last night:

Overall mortgage stress eased back to below 40% of borrowing households at 39.5%. But it remains very high. This is measured in net cashflow terms.

The RBA household debt to income ratio eased back as loans are paid down.

Across the states, mortgage stress is highest (in percentage terms) in Tasmania, NT and Victoria. Rental stress is highest in New South Wales. Overall financial stress (including mortgage, rental and investor stress) is highest in ACT and NSW.

Across our household segments, young growing families (which include first time buyers) are most exposed, together with households on new estates on the edges of our towns and cities. Rental stress is highest among first generation migrants, while investor stress is highest among most affluent households who are highly leveraged into investment property.

As a result aggregate financial stress is dispersed across many of our segments, indicating this is a real structural problem.

Top post codes by mortgage stress:

Top post codes by rental stress:

Top post codes by property investor stress:

Top post codes by overall financial stress:

As we discussed in our post last night there is a strong correlation between mortgage stress and high counts of JobSeeker claims. Melbourne is an example:

As the mortgage repayment holidays dry up we expect stress to remain high even if job growth recovers. This is a structural issue which will not be solved with more generous lending standards. Only real income growth would assist, but this seems unlikely for some time to come.

FINAL REMINDER – DFA Live Q&A Tonight – Latest Stress And Scenarios 8pm Sydney

Join us tonight at 20:00 Sydney for a live discussion on our latest research and analysis. You will be able to ask a question live via the YouTube chat. We will also have our post code tool online.