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Borrowers and brokers face ongoing higher rates, higher mortgage stress and continued falls in house price falls, an Australian mortgage market data analytics expert has warned.
Following a decision from the Reserve Bank of Australia to keep the cash rate on hold in April, Digital Finance Analytics principal Martin North (pictured above) said there was “no sudden relief on the cards” for mortgage holders when it came to interest rates.
“I expect rates to remain in their current bounds, with a risk of higher rates if inflation stays strong,” North said. “The RBA says they will wear higher inflation, so they won’t follow New Zealand, where rates are much higher. So, we might get a shallower but longer profile to rates – this means it is unlikely they will fall this year.”
Digital Finance Analytics’ mortgage stress data for March, which is measured on a household cash flow basis, found stress has continued to rise as households shoulder more cost pressure.
“The cost of living and costs of mortgages have risen substantially,” North said. “As I expect inflation to remain high, and interest rates to be above 3% for the next year or two, stress will continue to rise – as income growth is less strong than costs.”
Digital Finance Analytics defines a household as stressed if outgoings exceed income – excluding one-off discretionary items – based on its rolling research survey yielding data on 52,000 households.
North said while not all households would be hit, those in high growth corridors were the worst exposed.
The market conditions were leading to the growth of refinancing, as more household sought to reduce their mortgage repayments in response to the rising interest rate environment.
“Banks are competing for some deals with discounts, but many of these are temporary,” said North. “Many borrowers are able to get significant savings, though more are now being caught out with LVR and DTI parameters which means they may not be able to switch. I am looking for signs of ‘mortgage prisoners’.”
North said there was not enough attention paid to the rise in consumer debt, caused by people who have exhausted their savings after tapping into credit cards, buy now pay later (BNPL) or other credit forms.
“I see this as a big issue and I do not see enough focus on the total credit exposure of households. Those in stress are most likely to grab other credit forms. This will take time to play out, but it is worth watching. Credit scores and reporting are slow to adapt to this.”
House prices were also likely to continue to fall, North predicted, despite some signs and predictions in the market that prices in the housing market were beginning to bottom out or even rebound.
“Our scenarios suggest that the tighter credit will lead to price falls – credit is the biggest variable, and I do not see interest rates coming down to where they were a year ago.
“The spike in prices was artificial, created by ultra-low interest rates and government intervention, such as HomeBuilder.”
“While migration may help to put a floor on the falls in some places, I think the credit tightening will offset this.”
North said Digital Finance Analytics’ worst case scenario included the possibility of a local recession.
“Many of the signs of economic slowing are showing, and if we do get a recession, unemployment will rise – and that in turn will pull prices down further,” he said.
North said first time buyers were being squeezed by tighter underwriting requirements.
“Affordability has dropped by about one third for many, due to the 3% buffer above mortgage rates, and the tighter repayment cost calculations now in play. Some borrowers continue to trade up, or down, and we are also seeing more investment property coming on the market, as despite higher rents, the economics do not work.”
He said brokers could capitalise on higher rates and pressure on borrowers by assisting with refinancing and mortgage restructuring as people came to terms with market conditions.
North also expected to see a rise in the number of multi-person purchases in the property market in Australia, creating a niche as friends and or family combined to purchase properties.
He added that brokers could play a role in reducing the amount of money customers borrow.
“I think it is time to be more realistic about the size of loans offered,” North said. “Many of the issues have been created by too high LTV and LTI. Brokers need to take on board the new reality.”
What are your predictions for mortgage stress and house prices through 2023 and 2024? Share your thoughts or stories on this topic in the comments section below.
