Mortgage defaults on the rise as first home buyers feel the pinch

As generous as the government’s first home owner’s grant increase was in 2009, many of the buyers who took advantage of the incentive to get onto the property ladder could now be regretting their haste to purchase a home of their own.

With interest rates on the way up, there are genuine concerns regarding a rise in the number of delinquent mortgages, with 90+ days arrears reaching 0.54 per cent during the September 2010 quarter according to a recent Fitch report.

Meanwhile, the Real Estate Institute of Australia has released data that reveals the average proportion of income now required to meet loan repayments has climbed to 35 per cent.

Westpac and ANZ have both reported an increase in 90 day delinquencies, with the former bank revealing an increase to 59 basis points, up from 47 basis points in the September 2010 quarter.  While these figures may not seem all that staggering, experts in the industry suggest that this rise in defaults is worth noting.

Housing Industry Association economist Matthew King says, “This emphasises the serious affordability constraints we have in the Australian marketplace.”

Australian Property Monitors economist Andrew Wilson agrees, suggesting the surge in property prices across Sydney and Melbourne during the last decade has resulted in first home buyers struggling with higher repayments as housing values moved ahead of income.

Westpac reveals that it experienced a spike in first home buyer mortgages over 2007-2009 – a period when house prices were already over-inflated – and now some of these borrowers are struggling with the new interest rate environment and increasing monthly repayments.

Unfortunately, this also occurred around 2003-2004 when those who received the first home owner’s grant in 2001 overcommitted and were forced to sell up.

The main issue is that with lenders offering 90 to 95 per cent LVR’s in many instances, these buyers often rely almost entirely on the grant as their deposit, so have not established a savings discipline and in turn, struggle with their new financial responsibilities as home owners.

Chief executive of Westpac Gail Kelly hints that things may improve for borrowers when wages eventually catch up with the tighter employment market we are currently experiencing, but says we can expect more delinquencies in the coming months until this occurs.

“We haven’t yet seen that upward movement in wages, and we’ve only started to see growth in that area,” Kelly says. “Now, there is a broad expectation that this is going to happen, but we still haven’t seen it.”

Wilson agrees and adds, “The other end of the equation here is the cost of finance, because we’ve seen about seven interest rate rises throughout several months up to November, and then an additional one for Westpac buyers. So that affects their position as well.”

While Kelly says the overall market will not be detrimentally impacted by these increasing delinquencies, I would argue that we could see house prices in traditional mortgage belt suburbs start to suffer as some home owners are forced to sell up well below market value or the banks step in and act to recoup their money.

Additionally, with interest rates tipped to rise again before the end of the year, some experts warn that those already struggling could find themselves in further trouble and end up back on the rental roundabout.

Obviously this would create further upward pressure on rents, with vacancy rates across our capital cities already tightening this year.

Wilson says this current situation provides some insight into what we can expect from the property market into the foreseeable future.

“We don’t have a linear housing series anymore. These things come in ebbs and flows, and I don’t think we’ll ever have a boom and bust cycle in this country again. We’re seeing more of a time when prices and incomes will need to adjust over time.”

With the double whammy of affordability and interest rates causing ongoing concern for potential home buyers and first home owners, Wilson’s take on the housing market is more than plausible. For investors, this means doing your research and buying well located property, below intrinsic value that you can add instant capital to through simple cosmetic renovations and then hold over the long term is more important than ever. In this type of market there is no room for speculation.


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