Going, going, gone

Nearly 52,000 Australian households are at risk of defaulting on their mortgages in the next 12 months and one in four home owners is experiencing home loan stress, a data analyst report says.

According to Digital Finance Analytics (DFA), 767,000 households were in mortgage stress in April, meaning they had no wriggle room in their finances, up from 669,000 the previous month. Of those, 32,000 were in severe mortgage stress and unable to meet the current repayments on their home loan on their current income.

The data, drawn from household surveys conducted by DFA, data from the Reserve Bank, the Australian Bureau of Statistics and APRA, was a “concerning trend” that’s growing.

“What’s significant about the research is it isn’t just the usual suspects, those in the mortgage belt areas battling. We’re seeing households in all sorts of different areas now experiencing quite some difficulty in managing their mortgage payments,” DFA principal Martin North told ABC Radio Melbourne.

According to RBA data, Australia’s debt to income ratio has never been higher. People are reaching for larger mortgages to get into the property market, leaving themselves financially stretched, despite the rising cost of living (a 0.5 per cent increase in the March 2017 quarter) and static or falling incomes.

ASIC chair Greg Medcraft has warned Australia needs to learn the lessons of the 2007 US housing crash, which was triggered by sub-prime loans. A surge in interest-only loans to property buyers—both investor and owner-occupier—has the chief corporate regulator worried. It indicates that many people are buying properties they can’t really afford. Just like the US a decade ago.

“If your repayment is lower because you’re only paying interest and you ignore the fact that you will eventually need to pay the principle, that is a concern if you can’t afford it,” says Medcraft.

A big concern is the potential for double jeopardy—of a person defaulting on their home loan due to rising interest rates and then being forced to sell to a market where house prices are plummeting.

ASIC is warning home lenders to pay close attention to the living expense calculations being used to assess home-loan applications. A survey conducted by them two years ago found that 40 per cent of home-loan applications included living expenses that were unrealistically low.

Limits on investor lending were first introduced in late 2014 in an attempt to cool an overheating property market. Recent home price index readings show annual prices rises of around 18 per cent for Sydney, 15 per cent for Canberra and 13 per cent for Melbourne. Official data also show a renewed surge in property investor lending.

The crackdown on interest-only loans by ASIC follows APRA’s latest attempts to rein them in. The banking regulator has told banks to lower the proportion of interest-only loans to less than 30 per cent of home lending. Currently it’s around 40 per cent.

“[Lenders] must look at adequate living expenses compared to a more realistic interest rate over the longer term to make sure the mortgage doesn’t default,” says Medcraft. “It’s in everybody’s best interest.”

Further reading

theconversation.com

digitalfinanceanalytics.com