Mortgage Stress Continues to Bubble
Experts have been calling for the housing bubble to burst in Australia for many years now. Yet prices have continued to head north.
The rate of annual increases has moved at an even faster pace over the past few years. However towards the end of 2017 and 2018 thus far, there are indicators surfacing that suggest a breather in house appreciations may be upon us.
I was recently talking to the Principal of a well known Real Estate Agency in Sydney. With a perplexed look he said that in 2018 so far, he’d noticed a 10% drop in prices in his area compared to the prices achieved in 2017.
In his 20+ years in the business he has never seen such a high percentage drop in such a short period.
Financial Markets
I suggested he take a look at my world, the financial markets, some time.
People on the ground working in the industry are always way ahead of any reporting, so I listened. Perhaps it’s a short term hiccup or geographical anomaly, yet it made for an interesting conversation.
His comments reminded me of the way stock markets often react when prices take the final surge into new all time highs.
The last percentage gain is quickly snatched back when markets correct, or collapse.
The Digital Finance Analytics (DFA) April 2018 mortgage stress and default analysis update reports that over 963,000 Australian households are in mortgage stress, up from 956,000 in March.
This equates to 30.1% of owner occupied borrowing households. They estimate that more than 55,600 households risk 30 day defaults in the next 12 months.
This on top of continued flat wages growth, rising living costs, extra housing supply coming into the market over the next 3 – 5 years, and higher real mortgage rates. The RBA may continue to keep official interest rates low here in Australia, but this doesn’t mean banks will keep mortgage rates low.
If U.S rates continue to rise then bank lending costs are also going to rise. This means banks will act independently to the RBA to recover costs.
And where in the past borrowers would simply move from one lender to another to get a better rate, a strengthening of lending standards that has come out of the Banking Royal Commission is now going to make refinancing a far more scrutinised process.
As the Royal Commission continues to reform the banking system, the mess that has built up over the past decade, may finally see the chickens come home to roost.
