An interesting trend has emerged in recent months that has been, at face value, a little perplexing. Statistics confirm that mortgage arrears are rising.
In the face of historically low interest rates, strong consumer confidence and property values are increasing as a whole across the country, this is actually the opposite of what we would expect.
Yet, the facts don’t lie.
According to the Fitch Report, there are “worsening signals” in Victoria, where an unexpected deterioration in mortgage performance has emerged.
The state has experienced a delinquency rate of 1.37% and seven of the worst performing suburbs (including four of the top five) were located in Victoria.
What’s more, none of Victoria’s suburbs made it onto the shortlist of best-performing regions by value of mortgages. This is very interesting when you consider that the state recorded capital growth of around 10% in the last 12 months.
If that’s the case, and property values today are worth 10% more than they were this time last year, then why are people running into mortgage arrears?
A couple of reasons spring to mind.
Firstly, some homebuyers have become over-confident and have attached themselves to a level of debt that they can’t sustain.
It’s not just the mortgage…
People often buy property without realising the full extent of expenses they subsequently become responsible for. There are lots of extra costs and outgoings, including council rates, water bills and the cost of maintenance and repair, which can quickly account for a large chunk of a homeowner’s disposable income.
They may also get themselves into extra debt when they buy the new TV, bed, sofa and fridge to furnish their new home. This, combined with a sizeable mortgage, can put a lot of financial pressure on any household.
So, we know why people are falling behind on their mortgages.
But does this trend unlock any particular opportunities for savvy property investors?
As investors, we’re always looking for new ways to create value and generate profits from real estate.
Right now, certain areas are experiencing elevated levels of mortgage stress, which has led some to speculate that property buyers who focus on these areas could “nab a property bargain”.
I think it’s important to point out that just because an area has a statistically higher proportion of late-paying mortgage holders, that doesn’t mean there are going to be more mortgagee auctions or distressed sales in that suburb.
The banks are not going into foreclosure mode at present and people are not necessarily selling up; they tend to try to hold onto their homes as long as they can. Therefore, I can’t see a high level of “desperate sales” in the current market.
In the next year or two, it’s very likely that interest rates are going to rise. In those areas where people are already having trouble paying their mortgage, increasing interest rates are only going to add more pressure.
It will be the working class, lower socio-economic areas and the outer suburbs that may be hardest hit if this situation continues to develop.
Unfortunately, these are also the areas where unemployment may rise – we know the nature of employment in Australia is changing, with less manufacturing jobs and more opportunities in service industries such as health, retail and IT.
The people employed in these industries generally live closer to where larger groups of people are, which is the city rather than the outer suburbs.
This means those who own property in blue collar and many outer suburban areas may be hit with a double whammy: lower demand from potential buyers and a higher number of home owners in mortgage distress.
The result will almost definitely be “bargain” priced properties, but although the properties may be cheap, that doesn’t make them good investments.
If the suburb has generally under-performed in the past, there’s a good chance it will continue to do in the future.
I don’t know about you, but I don’t want to buy properties simply because they’re affordable and cheap.
I’d rather buy in more affluent and middle-class suburbs where jobs are more secure and where people have higher disposable incomes and they can therefore afford to buy properties not because the properties are cheap but because people want to live there and are prepared to pay a premium to live there.
In my view, cheap and cheerful is not the road to travel down if you want lasting success in the property game.
Stick to locations close to the big cities, buying properties with broad appeal to owner occupiers, ones with an element of scarcity and to which you can add value through renovations and you’ll be in a much better position to enjoy lasting profits from your property investments.