Is there an investment opportunity in buying in mortgage stressed suburbs?
I was recently asked by a journalist why in today’s low interest rate environment has mortgage stress risen in some suburbs and is there a way property investors can profit in these areas?
I guess the concept is that if a vendor is experiencing difficulty paying their mortgage for one reason or another (unemployment, underemployment, illness, divorce; the list goes on), there’s a better than even chance that they’ll accept a low-ball price simply so they can walk away from the stress.
Could this type of scenario create an opportunity for shrewd investors to bag an under-market property deal?
Apparently new research from Fitch ratings has revealed the areas throughout Australia that are experiencing the highest levels of mortgage delinquency, with seven of the top 10 worst areas located in Victoria.
Budgewoi in NSW replaces Surfers Paradise on the Gold Coast as the worst-performing postcode by value of mortgages in arrears as of 31 March 2014, according to the report.
“Almost all of the 20 worst-performing postcodes were located in metropolitan regions, specifically in regions characterised by week socio-economic variables,” confirms report author James Zanesi.
“Surfers Paradise and Palm Cove in Queensland were the only popular tourism destinations among the worst-performing postcodes. Tourism had been a hallmark of the worst-performing locations between 2008 and 2013; however, these areas have generally improved as the property market has recovered.”
Budgewoi may be in first place this year, but it has languished among the worst-performing postcodes over the past five years, appearing in nine of the 10 surveys up to March this year.
My thoughts on this:
Here’s what I was quoted as saying in Your Investment Property:
Property expert Michael Yardney, director of Metropole Property Strategists, makes another interesting point, noting that interest rates are currently the lowest they’ve been in a number of years, and property values are increasing in every state.
“It’s fascinating to me that mortgage arrears are rising in this market; it’s actually the opposite of what you’d expect,” Yardney says.
“Look at Victoria, for instance; according to the Fitch report, Hume was the worst-performing region in Australia, with a delinquency rate of 2.93%. When you consider that Victoria as a whole experienced capital growth of 10% plus in the last 12 months, it makes me wonder why are people running into mortgage arrears?”
The answer is complex. It could be related to the fact that some homebuyers grew overconfident and borrowed heavily, ending up with a level of debt that was more than they could handle.
“Some people transition from renting to home ownership without recognising that when they buy a house there are lots of extra costs and outgoings, like maintenance and council rates,” Yardney says.
“They also buy a new TV and fridge and furniture and they kit their new home out, which comes at a cost.”
Can investors benefit from MORTGAGE delinquency data?
Regardless of why delinquency rates are rising, Yardney believes investors need to do more research before blindly diving into these areas to chase under-market deals.
“Rising delinquency rates don’t necessarily mean there are more mortgagee auctions or sales; I certainly don’t see a high level of desperate sales in the current market,” he says.[sam id=54 codes=’true’]
“That said, looking ahead in the next year or two, it’s very likely that interest rates are going to rise, and in those areas where people are currently having trouble paying their mortgage already, that’s only going to add more pressure.”
At the same time, these are also the areas where unemployment may rise, as the nature of employment in Australia is changing, Yardney adds.
“We’ve got less manufacturing and more service industries, such as health, retail and IT, and the people employed in these industries generally live closer to the city. So it’s potentially going to be a double whammy for those working-class, outer-suburb areas that may suffer more next year and the year after,” he says.
“There could be cheap properties to buy, but that doesn’t make them good investments, especially if those areas have generally underperformed in the past, as they will continue to underperform in the future.”
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