What risks lie ahead for Australia, it economy and our property markets?
In it they explained that there are many largely external factors that relate to financial risk.
Here’s what they said:
And they are all inextricably intertwined.
This current report which focussed on Financial Risk, looks in detail at two of the most critical issues facing households:
- Mortgage stress (debt); and
- Investor stress particularly as it relates to retirement readiness and Australia’s ability to fund its retirement bill for an ageing population.
These issues are not only critical to households but also to governments and financial institutions.
Mortgage stress – caused the GFC – like a little speck of sand in an oyster – it was worried, nurtured and covered up until it grew into a full blown recession in the US and then the Global Financial Crisis.
Of course there was a particular environment of greed, creative financial packaging, institutionalised corruption , blind eyes and more…..
Including a refusal to recognise and treat the massive levels of hidden unemployment
None of that’s changed, so we really should be looking very closely at mortgage stress in Australia – and what might be the tipping points.
The great Australian dream of home ownership is in decline while renting is on the rise.
In 2000 almost 72% owned or were paying off their own home – now it’s just 65%.
However the proportion of Australians with a mortgage (paying off their home) has remained remarkably consistent at around 30%.
APRA reports almost a trillion dollars of mortgage debt ($927 billion).
The chart shows a steady increase in mortgage debt until 2015, the sudden jump 2015 to 2016 is due to APRA/Banking reclassification of investment home loans (including them in this category)
Although the proportion of Australians with a mortgage has remained consistent over the last 8 years, the ‘number’ has grown with population growth and two other drivers are contributing to this growth in the nation’s mortgage debt:
• Property prices have gone up – median value is up 33%;
• Amount borrowed has gone up – by 41%;
And there seems no great hurry to pay back their loans so mortgage debt is now almost double what it was in 2008.
A comparison of the growth rates of household incomes and home prices shows clearly that household incomes have not kept up (particularly since 2013).
Since 2008 median household incomes have risen by 23.5% , compared to median home values up 33.5% and median amount borrowed up 41%.
‘All things being equal’ this differential in household incomes and house values, combined with increased debt would be expected to result in increased mortgage stress.
However ‘ all things are not equal’ and lower interest rates have had a counterbalancing effect as we will see.
Some 18.4% of mortgage holders are ‘at risk’ and 13.9% at ‘extreme risk’.
Mortgage stress is based on the ability of home borrowers to meet the repayment guidelines currently provided by the major banks.
Mortgage holders are considered ‘At risk’* if their loan repayments to pay off their mortgage are greater than a certain percentage of household income.
They are considered ‘Extremely at risk’** if even the ‘interest only’ is over a certain proportion of their household income.
Over the period shown here, mortgage risk peaked in May 2008 when the standard variable home loan rate was 9.45%.
The latest figure shown on this chart is for the 3 months ended April 2016 with a standard variable rate of 5.65%
The latest rate reduction brought the standard variable rate down to 5.25 which ‘would theoretically bring the proportion of Mortgage holders ‘at risk’ down to 17.4% and ‘Extremely at risk’ down to 13.4%.
* “At Risk” is based on those paying more than a certain proportion of their household income (15% to 50% depending on income) into their loans based on the appropriate Standard Variable Rate reported by the RBA and the amount the respondent initially borrowed.
** “Extremely at Risk” is based on those paying more than a certain proportion of their household income (30% to 45% depending on Income) into their home loans based on the cash rate set by the RBA and the amount respondents currently owe on their home loan.
This chart shows the impact that changes to the standard variable rate would have on mortgage stress levels – all else being equal.
It is not surprising that interest rates , housing prices and household income have a major impact on mortgage stress.
But when we look beyond the averages- there are some surprising discoveries.
Like any market – the home loan market presents a very different story depending on the unit of analysis – loans or $s.
At the lower end, nearly one in four home loans (23.7%) have outstanding balances of under $100K but these loans account for less than 5% of the outstanding dollars.
At the top end only 2% of loans have over $750K, outstanding but they make up 7.2% of total outstandings.
The majority of loans are under $250k, but the remaining 42% of loans represent almost 70% of the $ value.
So where’s the stress?