Mortgage Arrears Rising as ‘at Risk’ Borrowers Hit Pre-GFC Peaks
By Business Reporters Michael Janda and Kirsten Aiken
The level of mortgage arrears is creeping higher and the number of borrowers at risk of mortgage stress is at its highest level since 2008.
Based on its regular surveys that include more than 10,000 owner-occupier mortgage borrowers each year, Roy Morgan research estimates that 1.43 million, or 28.7 per cent, were “at risk” of mortgage stress in June 2023.
That is 539,000 more households than were considered at risk before the RBA started its aggressive string of interest rate rises in May last year.
It is also the equal biggest number considered at risk since 1.46 million in May 2008, just before the global financial crisis (GFC) exploded and the RBA cash rate was slashed from 7.25 per cent to 3 per cent in the space of about half a year, starting in September 2008.
Roy Morgan estimates the number at risk will pass 1.5 million, to hit 30 per cent of mortgage borrowers, if the Reserve Bank raises interest rates next week, taking the cash rate to 4.35 per cent.
The company’s chief executive, Michele Levine, said that number could increase dramatically if unemployment also jumps.
“If there is a sharp rise in unemployment, mortgage stress is set to increase towards the record high of 35.6 per cent of mortgage holders considered ‘at risk’ in May 2008 during the global financial crisis,” she added.
Roy Morgan defines households at risk of mortgage stress based on the percentage of income they need to spend to make their repayments, which is varied according to their income level.
Ms Levine said she is even more worried about the rise in households “extremely at risk”, for whom even the interest component of their mortgage exceeds a comfortably affordable proportion of their income.
“Of even more concern is the rise in mortgage holders considered ‘extremely at risk’, now estimated at 943,000 (19.6 per cent) in June 2023 — the highest for over a decade since September 2011 (22.6 per cent),” she said.
“This is an increase of over 400,000 mortgage holders from a year ago (+7.8 percentage points).”
Mortgage stress not showing up in arrears
While surveys consistently show a large number of mortgage borrowers are feeling financially stressed — consumer confidence for this group is well below those without mortgages, including renters — this is yet to translate to a surge in loan arrears and defaults.
Erin Kitson from ratings agency S&P Global said arrears have been edging higher, but from a very low base during the pandemic period.
“Mortgage arrears have been increasing for a number of months now, and that’s not surprising given the rapid rise in interest rates that we have seen,” she said.
“But you look at them in aggregate levels, despite the increases, they are still around long-term averages.”
However, the picture is a lot bleaker for those living in the outer suburbs of Australia’s major cities, where the greatest number of recent first home buyers are concentrated.
“If you look at mortgage arrears on the outskirts of capital city areas, they tend to be higher and have experienced larger year-on-year increases compared to inner-city areas where mortgage arrears are lower,” she observed.
“That’s not surprising when you look at the types of borrowers that are likely to be more common in those areas, particularly because housing is far more affordable.
“You see more first home-owners in those areas who typically have high debt levels.”
The most recent (2021) census data from the Australian Bureau of Statistics, analysed by S&P, shows many of these areas also have below average incomes.
Ms Kitson agrees that arrears will rise above average levels as more borrowers roll off cheap fixed loans onto much higher variable rates.
“I think that arrears haven’t certainly haven’t peaked yet,” she said.
“I think that further arrears increases are ahead of us, particularly because the cash rate, we don’t think it has peaked yet.
“In terms of when we think arrears are probably more likely to peak, I think we’re more likely to see that towards the end of the first-half of next year,” she said.
Fidelity portfolio manager and financials analyst Zara Lyons agreed the worst was yet to come.
“It’s like a stretch of an elastic band — the consumer just feels this tension and it’s increasing.”
However, she added that the banking sector is well placed to handle rising arrears.
She said the banks’ hardship teams were “preparing for a tsunami but so far it’s been a trickle” of customers seeking assistance with their home loans.
Ms Kitson agrees that arrears and defaults will not rise to dangerous levels that threaten a property crash or financial stability.
“Because unemployment is still quite low and is forecast to remain relatively low,” she explained.
“That is certainly going to help keep mortgage defaults at not particularly high levels, and certainly not levels where we’re concerned about high levels of distressed selling.”