Up to 1 million households 'on the edge' of mortgage default by September, analyst warns

Discussion in 'Four Corners' started by the_flight_of_the_magpie, Jul 11, 2018.

  1. the_flight_of_the_magpie

    the_flight_of_the_magpie First Grade

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    Up to 1 million Australian households could be in danger of missing mortgage repayments by September.

    Key points:
    • An increase of 0.10 percentage points would mean paying about an extra $60 a month on a $750,000 mortgage
    • Some analysts expect increases around 0.15 percentage points
    • The cost of borrowing money domestically is also rising


    That is the warning from one independent analyst if the big four banks do what many fear they will do and increase their standard variable rates rise by as little as 0.15 percentage points over the next few months.

    "I'm almost certain they'll be forced to lift those rates, it's a question of timing, and of course the political reaction when it happens," Digital Finance Analytics principal Martin North said.

    A significant portion of Australia's banks have already started to lift their interest rates.

    Macquarie Bank — not one of the big four, but with similar access to funding as the big four — will raise variable rates on its owner-occupier loan products for those paying principal and interest by 0.06 percentage points on Friday.

    Those paying off interest-only loans will have their rate increased by 0.10 percentage points.

    It follows similar moves by AMP, Bank of Queensland, Suncorp, and ME Bank.

    So the big question is, when will the ANZ, Westpac, CBA and the NAB move their rates higher?

    "I think that by September we will see these rate rises in place, unless the international financial markets change direction quickly," Mr North said.

    "The pressure is building and it will continue to build.

    "We're going to see the Federal Reserve raising rate further in the US.

    "We've seen the funding costs really not adjusting back very quickly, so I think they've probably got to do something."

    What will Australia's biggest home loan provider do?
    The Commonwealth Bank is Australia's biggest home loan provider.

    The ABC asked the bank's chief economist, Michael Blythe, if he could shed some light on when the CBA would make its move on interest rates.

    "Well look, all banks are facing the same issue," Mr Blythe said.

    "Part of that funding pool that they draw on, be it domestically or overseas, we have seen some upwards pressures on interest rates in those areas."

    US could drive Aussie rate rise
    [​IMG]
    Australian home loan interest rates could be pushed higher by climbing US interest rates, explains Ian Verrender.


    Queensland Investment Corporation's director of research, Katrina King, was a little more forthcoming.

    She explained that the banks are facing increasing pressure from shareholders to maintain their profit margins, and that means they will raise their rates soon.

    "I think that they do have to listen hard to their equity investors, and with their cost of funding increasing, this may be some way to alleviate the pressure on their net profit, and the expectations for their profit, and be able to reward their shareholders," she said.

    "So the pressure's certainly there."

    Ms King said most households could relax though, because she expected interest rates to only move up a fraction from where they are now.

    "With the sort of funding pressure we've seen in the front end, they may only need to raise rates 7 to 10, maybe 15 basis points (0.15 percentage points) in order to alleviate the pressure on them."

    '975,000 … are right on the edge now'
    Mr North is not as relaxed as Ms King.

    He said he expected the big four will increase rates on standard variable mortgage rates by at least 10 to 15 basis points, or 0.15 percentage points, to cover the increase in their cost of funding.

    Mr North has been quoted widely warning of the dangers of raising interest rates while many Australian households are already suffering mortgage stress.

    His firm, Digital Finance Analytics, surveys thousands of households to gauge their financial situation and has found many have little to no buffer to meet increased expenses.

    He warned a 0.15-percentage-point increase in interest rates could push roughly a million Australians towards mortgage default.

    "Today 975,000 households across Australia with owner-occupier mortgages are right on the edge now," Mr North said.

    "And there are around 50,000 who are already over the edge and are looking like they could default.

    "If rates went up by 0.15 percentage points, that would go up closer to the round million."

    But another banking analyst has poured cold water on Mr North's forecast.

    "I find that figure [1 million at risk of default] surprising," Shaw and Partners banking analyst Brett Le Mesurier said.

    "If you think about it, if many of those households were really on the edge, they'd have to cut back more on their discretionary spending, not default on their home loan."

    'This is all part of building more pain in'
    The mathematics are not complicated.

    In Sydney, for example, a household with a $750,000 mortgage would have to pay an extra $60 a month if their interest rate rose by as little as 0.10 percentage points.

    "But it's that marginal borrower, it's the borrower who is already up against it, who's got little wiggle room, who's already struggling with childcare costs, fuel costs, electricity costs," Mr North said.

    "Even a small rise, and remember that the income growth is nowhere, and costs are beginning to rise, so this is all part of building more pain in."

    Not if, but by how much
    [​IMG]
    Housing forecasts have gone from disagreement over whether home prices will fall to debates about how much they'll decline.


    The Reserve Bank has made it clear it is in no hurry to raise interest rates.

    But Australia's banks do not just follow the Reserve Bank's moves on rates; they are also dependent on interest rate rises in other money markets.

    The cost of sourcing funds is rising overseas, especially in America.

    But the cost of borrowing money domestically, from within Australia, is also rising.

    That is because the Trump administration has asked many major US companies to pull out from offshore investments, including in Australia, as part of its tax policy.

    As companies like Google and Microsoft withdraw funds from Australia's money market, the price — or interest rate — of the remaining funds goes up.

    "It's become significantly more expensive for Australian banks to fund themselves," Ms King said.

    "For example, a three-month bank bill swap rate [short-term money market] was about 1.7 per cent through most of 2017, and is now 2.1 per cent, so it's costing them a lot more to fund."

    It raises the question of whether the nation's central bank will actually step in to ease the pressure on Australian households by cutting the cash rate.

    AMP Capital's head of investment strategy, Shane Oliver, argued that the Reserve Bank may well be compelled to cut interest rates, and not just to relieve household debt stress, but also to keep the entire economy afloat.

    "It's hopeful that the consumer will eventually come to the party," Dr Oliver said.

    "The risk is that'll take longer than expected, and the Reserve Bank will have to stay on hold for a lot longer.

    "In fact we don't see the RBA raising interest rates until 2020 at the earliest, and I'd have to say, you still can't rule out the next move being a cut, rather than a hike.

    www.abc.net.au/news/2018-07-11/up-to-1-million-households-may-go-into-mortgage-default-by-sept/9976268

    this smells like the American sub prime issue they had a few years back
     
  2. Surely

    Surely Moderator Staff Member

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    Except Aussies just can't hand back the keys and walk away

    Oh and.our market is tiny compared to the us
     
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  3. cerberus

    cerberus First Grade

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    Ragging out aspirational voters again .
    Ooh dear

    3 cheers for the libs that made us homeless
     
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  4. butchmcdick

    butchmcdick Guest

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    I know this is anecdotal but my other halves boss is one of these

    He had a place in a city near here ( Ballina) that he took all the equity out of to buy some land in Lismore which he built a brand spanking new house with all the bells and whistles ( gold plated taps, tiles that cost a shit load per metre etc). His missus had to have new furniture for the house. Oh and a new car ( a new prado)

    I think between the new house, new furniture, top of the range fittings and new car I reckon he’s at least 700 k in the hole


    Now the his missus has lost her job

    If rates go up he is already stretched as f**k
     
  5. Bandwagon

    Bandwagon Moderator Staff Member

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    As @Surely says, our market is very different in as much as you don't just get to walk away, so unless you've put yourself in hole that there is no digging out of, you'll hang in there and keep paying, even if you start to move into negative equity ( which is the big trigger for collapse )

    The killer of course is if it get's to the stage where prices drop enough that people are better off calling it a day and entering bankruptcy. I don't know what kind of fall that'd need to be to start becoming problematic, but I'd be guessing the Reserve would be dropping rates well before we reached that kind of level.

    I think the one thing that is happening is that we are seeing real estate starting to return to long term growth levels, and the magic pudding that it has been for the last coupla decades is all but run outta steam.
     
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  6. butchmcdick

    butchmcdick Guest

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    Is that the same in Sydney and Melbourne ?

    I know that Hobart say has had some double digit gains in the last year or so

    Locally we've had some pretty good growth around town and I might be wrong but other regional centres have as well
     
  7. Surely

    Surely Moderator Staff Member

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    If you'd like an idea what would happen just look back to the recession we had to have .

    Although here they are talking points of a percent not multiple percent iincreases

    I lived in Noosa at the time and I remember properties in Hastings Street being sold for less than half of what they were purchased for.

    Was quite the bloodbath
     
  8. DC_fan

    DC_fan Coach

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    Might be some good bargains around soon
     
  9. Bandwagon

    Bandwagon Moderator Staff Member

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    Yeah regional centres ( which you could describe Hobart as ) are still doing ok, But I'd say they are lagging markets, following the capital cities, but a few years behind.

    Anecdotally, I sold the family home in December, very quickly, and above asking. ( we literally had only three buyers go through the place and got three offers, one of which pulled out ) , and that's on a rural residential property right at the top end of the Lismore market. But, all three buyers were out of Sydney, and in that top end, you are pretty unlikely to sell to a local.

    So, using that as an example, as the price growth in Sydney drops, these buyers aren't as cashed up as they were, so they disappear to an extent, and that will feed through to prices locally, just as it has done in terms of funding growth over the past decade or so.

    It's not all doom and gloom, but I'd say that if you are expecting to get the growth levels we've seen over the past few years here, I'm betting you're going to be disappointed. It could of course go the other way, and people looking to downsize their debt could well see rural / regional as a viable alternative, but that needs to be balanced against their ability to earn an income that leaves them better off, and those jobs are pretty limited in the regions.
     
  10. Danish

    Danish Referee

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    If a person has put themselves in such a terrible financial position that historically very low rates going up by 0.25% can ruin them, then they deserve to go bankrupt.

    My suburb of Caringbah is currently overrun with overpriced duplex monstrosities. These pricks drove up the price of land in the shire so badly you couldn’t buy a knock down fibro shed for under $1.3 million a year ago, and now they are struggling to get rid of their freshly built McMansions for the same money. Once you factor in build costs, CGT, and a couple years worth of interest only payments plenty will be selling at a loss now.

    Hopefully the housing market continues to cool like it has been all of 2018 and we start seeing more affordable prices again.
     
  11. Smack

    Smack First Grade

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    That's how it is here too Danish. Plus we are getting more and more high rise apartments.
     
  12. Surely

    Surely Moderator Staff Member

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    Much lower housing costs a bit lower income depending of course on your vocation.

    There are some really good buys ,last place I bought , 4 bedroom older style timber house in very good condition, huge self contained accom unit, on 22 acres, two big dams one spring fed, great views, 305k

    I've got to put concrete outdoor area out the back and that's about it, maybe polish the floors if I can be arsed tackling the glued down underlay.

    Speaking of vocation, if youre a tradie up here then you are laughing, I got my quote for concreting in January, still waiting for him to do the job.
     
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  13. butchmcdick

    butchmcdick Guest

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    I know a guy who bought a place for close to 900k in Goonellabah

    900k

    In f**king Goonellabah
     
  14. Parra

    Parra Coach

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  15. Pete Cash

    Pete Cash Immortal

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    A two bedroom apartment next door to me went for 860k on the weekend so the market is still pretty hot in petersham
     
  16. Danish

    Danish Referee

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    Petersham and the inner west in general will be fairly protected IMO as the the supply side hasn’t been able to be driven up too much through development. People haven’t been flooding the market buying up big blocks and trying to squeeze a few townhouses or a block of units on them.

    All those new apartment blocks around Arncliffe and Wolli Creek would probably be in a bit of strife though you’d think
     
  17. Pete Cash

    Pete Cash Immortal

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    Yeah this is a very desirable place to live. Its well provided by transport, close to the city and like you said not very built up.

    I dont want to give me street away lol but its a pretty big street and its 99.9 percent fairly large houses rather than apartments. Obviously there are apartments because i just commented on one selling but its not common.
     
  18. Jimbo

    Jimbo Immortal

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    Harsh but fair

    It might be politically expedient to blame the government for housing stress but there has to be a point where personal responsibility comes into it
     
  19. Jimbo

    Jimbo Immortal

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    Wow. My grandparents used to live there

    How big was it?
     
  20. butchmcdick

    butchmcdick Guest

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    5 bedder plus tennis court
     

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