Mortgage Stress Grows In Australia
November 2, 2023

Aussie households are in trouble. Despite the fact there has been a pause in the series of interest increases in recent months, homeowners still find themselves in the midst of a nightmare, which also goes by the name of mortgage stress. The danger is, a situation such as this can branch out as financial and emotional tolls on individuals and families. 

Mortgage stress occurs when a significant portion of your income is allocated to servicing your home loan, often to the detriment of other financial obligations. This can lead to excessive financial pressure, potentially making it challenging to meet your monthly mortgage payments.

Typically, mortgage stress is considered to manifest when a household dedicates over 30% of its pre-tax earnings to its mortgage. To put it simply, if your pre-tax monthly income amounts to $7,000 and your monthly mortgage payments surpass $2,100, you may find yourself in a situation of mortgage stress.

‘The’ mortgage stress 

Australia has topped the list amongst developed countries. Not one that calls for celebration but one that calls for precautions. Australia currently holds the distinction of having the highest level of mortgage stress where it has outdone all the countries that fall under the ‘developed’ countries bracket. As explained in The Guardian, the International Monetary Fund (IMF) has reported that 15% of Australians’ income is allocated for paying off their home loans. This financial pressure has been exacerbated by a series of interest rate hikes implemented by the Reserve Bank of Australia (RBA), spanning eight consecutive months from May to December 2022, when the IMF gathered its data. As mentioned in AFR, an estimated 18% of loans nationwide carry a significant repayment burden, characterised by allocating over 30% of household income to payments, as detailed in confidential RBA research made public through Freedom of Information regulations. 

UK’s Housing Market In Mortgage Crisis IMG 1

As a result of these rate hikes, Australia now leads the world in terms of debt burden, with Canada, Norway, and the Netherlands following closely behind. Furthermore, the Reserve Bank of Australia has raised interest rates four more times since December 2022, bringing the cash rate to 4.1%. A report by the Australian National University in July projected that if rates were to rise by an additional 50 basis points to 4.6%, Australians would be dedicating a substantial 40% of their income to servicing their mortgages and other loans.

These alarming figures were disclosed in the IMF’s semi-annual global financial stability report, along with a cautionary note that approximately 5% of banks worldwide could face vulnerabilities if central bank interest rates persist at elevated levels.

Additionally, recent research conducted by Roy Morgan paints an alarming picture where as per the statistics, an all-time high of 1.57 million mortgage holders, equivalent to 30.2% of such individuals, were categorised as ‘At Risk’ of experiencing ‘mortgage stress’ in the three months leading up to August 2023. A number that climbs over what was recorded during the 2008 global financial crisis. Albeit the fact that the percentage of individuals experiencing mortgage stress is lower than it was in 2008, the total number of Australians vulnerable to such stress is currently higher. This increase can be attributed to the growth in population and the greater number of people participating in the mortgage market.

Over the course of a year marked by interest rate hikes, the number of Australians classified as ‘At Risk’ of mortgage stress has surged by 759,000 since the Reserve Bank of Australia initiated a series of interest rate increases in May 2022. As of September 2023, official interest rates have reached 4.1%, the highest level recorded since May 2012, over a decade ago.

The burden of undue stress of Australia’s mortgage problem

At present, the number of Australians classified as ‘At Risk’ of mortgage stress stands at 1,566,000, a record high. This figure represents 30.2% of mortgage holders, although it remains lower than the record highs observed during the Global Financial Crisis 15 years ago when 35.6% of mortgage holders experienced mortgage stress. The segment of mortgage holders considered ‘Extremely At Risk’ has grown to encompass 1,066,000 individuals, equivalent to 21.0%. This statistic is notably higher than the long-term average recorded over the past 15 years, which stands at 15.3%.

The implications

The uptick in mortgage repayments is feeding into the rising cost of living. The combined pressure of two substantial stress factors is sending most Australians over the edge. The number of households that are lagging in repayments is also on the rise and experts are of the opinion that even though it is a mayday situation, currently, Australia is yet to see its mortgage arrears reaching their peak. 

As stated in News.com.au, RBA assistant governor Chris Kent (the head of the financial markets division) delineates how with many borrowers forced to reduce their spending to meet higher mortgage payments, and the added burden of rapidly rising living costs, households are facing significant financial strain. Households with an average mortgage of $585,000 are now shelling out an additional $1,415 every month compared to before the Reserve Bank of Australia (RBA) initiated its tightening cycle in May 2022. If the RBA proceeds with another 25 basis point rate hike before the year ends, the average monthly repayments will increase by an additional $96. Typically, changes in interest rates take about 12 to 18 months to fully affect households and businesses. However, the surge in fixed-rate lending that occurred during the pandemic might lead to a slower impact during this tightening cycle.

Despite all the downturns, the reason why borrowers are still holding their end of the bargain and standing resilient in the face of adversity is because Australia has a steady and reliable employment sector. Australia’s robust job market is acting as a safeguard, preventing the nation’s most debt-burdened borrowers from slipping into arrears on their home loans. The strong growth in employment and nominal wage hikes have acted as a shield for borrowers, helping to protect themselves from the financial daggers being hurled at them by elevated interest rates. AFR further elaborates how according to experts, while the nationwide unemployment rate stood at 3.7% in August 2023, homeowners likely experienced an even lower rate of unemployment, estimated to be between 1% and 3%. A value that can be considered almost null and void. However, this is not to say that a continued rise in interest rates would not loosen the nails on a guardrail as such. If high employment rates and steady income are the lifeboats of the borrowers, a puncture in it is all it would take for the entire system to sink to the deepest depths of a mortgage crisis. 

(Sandunlekha Ekanayake) 

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