There's lots of talk about mortgage stress and the risk of loan defaults, but a recent study showed that certain outer suburbs are twice as likely to have loan arrears.
Homeowners in Sydney’s southwest, Perth’s northwest, and Melbourne’s northwest suburbs are the most financially stressed across the country, with the highest number of households at risk of falling behind on their mortgage, according to a new S&P Global Ratings report.
The data shows that suburbs in these areas are more than twice as likely to be over a month behind in paying their mortgage.
The figures show mortgages more than 30 days late are highest in Sydney’s south-west, with some as much as 2.5% of loans falling behind, followed by Perth’s north-west, Melbourne’s north-west, and then the Blue Mountains in NSW.
In comparison, the national average sits relatively low, at 1% of loans.
The higher-risk areas are also where property prices and incomes are lowest, meaning they have a high density of highly leveraged first-home buyers.
In contrast, the areas where mortgage arrears are lowest are the suburbs where incomes and house prices are highest, such as Sydney’s affluent Eastern Suburbs.
Areas with the highest and lowest mortgage arrears across Australia
Source: S&P Global Ratings/AFR
Arrears and borrowing capacity to worsen
The Reserve Bank has previously warned that pressure on borrowers is “unevenly spread”, with banks already setting lending limits on some suburbs, the AFR reports.
And S&P expects that its new figures will make banks cautious about lending in particular areas.
S&P analyst Erin Kitson explains that banks will be forced to examine the data as they determine lending policies such as requiring higher deposits for property purchases in some higher-risk areas.
“While unemployment remains low, and overall arrears are still below pandemic levels, when we look at the capital cities we are seeing a divergence in the places where borrowers are late to repay.”
But Fitch Ratings Agency analyst Jack Do says that the type of borrower is more important to consider rather than their location, adding that he sees no large areas of concern.
“They have ticked up a little bit through the second half, but there is not that much disparity between the areas. It is not so much about geography trends, but tracking higher-risk customers,” he told the AFR.
Fitch said banks would be examining borrower characteristics, such as those who had bought a home in the last two years, and who had borrowed at a high debt-to-income ratio with a lower deposit.
“The more flags you tick, the higher a risk profile borrowers go into. These are the borrowers that banks are trying to contact to manage the risks,” he said.
Remember, these suburbs all have something in common
It’s important to note that these outer suburbs have one thing in common - they all have residents who come from a similar socio-economic group.
Key populations for mortgage stress include lower- to mid-socioeconomic areas, regional areas, and younger households that borrowed or refinanced to their maximum earlier in the pandemic.
Many of these households would have been stress tested for rate rises up to 3%, and now rates have far surpassed this point they may struggle to continue to meet repayments.
Households in these socioeconomic areas have also likely exhausted their lockdown savings.
At the same time, many of these households are younger Australians or first-home buyers who haven’t held their property for long enough to have accumulated equity.
In contrast, many of our inner and middle-ring suburbs are owned by people who are long-term homeowners who have either paid off a significant part of their mortgage or paid it off in its entirety.
Moving forward markets will be fragmented
Moving forward our property market will be much more fragmented.
After all, there was never just one Sydney or Melbourne property market but markets within these markets – there are houses, apartments, townhouses, and villa units located in the outer suburbs, middle ring suburbs, inner suburbs, and the CBD.
And they're all behaving differently.
Why?
Because, as I mentioned above, each different socio-economic and demographic segment across the city is experiencing the rising cost of living differently.
Inflation, higher rent, and higher mortgage costs at a time when wages aren’t rising at the same rate will either prevent first-home buyers from entering the market or restrict their borrowing capacity.
There are many first-home buyers who borrowed to their full capacity and will struggle to make repayments at increasing rates going forward which will restrict capital growth at the lower end of the property market.
Then there are the gentrifying suburbs where more affluent homeowners have established money with higher disposable incomes and who are at minimal or even no risk of defaulting on mortgage repayments even in the face of rising rates.
A final note for investors
At Metropole, we recommend investing in suburbs where residents’ income is increasing faster than the national average.
These are usually gentrifying areas or aspirational suburbs.
Residents in these locations typically have higher disposable incomes and are likely to be prepared to pay a premium to live in a property in one of these locations.
So it's these suburbs which are able to withstand fluctuations in the property market and increases in interest rate rises.
Houses and townhouses in these areas would typically make great investment opportunities, but most importantly, you need to ensure you invest in an investment-grade property… because while any property can be considered an investment, they don’t all make good financial sense.
What makes a great investment property for me, is not likely to be the same as what would suit your investment needs.
You also need to make sure to invest only in areas where properties hold their value over the long term.
But even before looking for the right location, make sure you have a Strategic Property Plan to steer you through the upcoming challenging times our property markets will encounter.
Because aside from remembering that you should focus your efforts on investment-grade properties and locations, you also need to remember that property investing is a process, not an event.
That means that things have to be done in the right order – and selecting the location and the right property in that location comes right at the end of the process.
