24 September 2018
As Australia’s levels of household debt relative to disposable income hit historic highs, experts are warning of a perfect financial storm on the horizon for struggling home owners with a surge in repayments set to hit interest-only home loans over the coming 12 months.
Homeowners, particularly in the mining states of WA and Queensland, are already grappling with a number of factors including unemployment, under-employment, stagnant wages growth and weak house prices.
Another looming threat is rising interest rates, with three of the four major banks raising variable home loan rates earlier this year independent of the Reserve Bank of Australia.
Andrew and Rachel Hayden built their dream home in Perth’s south-eastern fringe three years ago, but they are expecting a mortgage default notice from their bank within a month.
“We put probably $600,000 into it and [are] probably going to sell it for $480,000 — shocking,” Andrew Hayden said.
He said he wanted to unlock his superannuation to pay his mortgage but couldn’t until the bank served him a default notice.
The couple’s financial problems began when Rachel Hayden fell ill 18 months ago.
The mother of five was forced to stop work and Mr Hayden had to shut down his business to care for her.
“[I feel] absolutely gutted,” she said. “You do everything by the book, everything. Gutted for the kids, they don’t do sports or anything and haven’t because you just can’t afford to.
“It took us so long to get here and we thought yes, no wasted rent money or anything like that.
A surge in mortgage stress cases
The Haydens’ tale is a common problem felt across the economy as households become increasingly stretched.
Siobhan Meerman, a financial counsellor at the Midland Information, Debt and Legal Advocacy Service (MIDLAS) based in Perth’s eastern suburbs, is at the coalface of the problem.
She said 75 per cent of the clients who walked through her agency’s door were suffering mortgage stress, an increase of about 25 per cent in the past two years.
“The clients I see coming in can be of any age,” Ms Meerman said. “They can be single people, couples with and without children, most of them are coming in about to lose their house.
“A lot of them have been FIFO [fly-in, fly-out] workers, but increasingly in recent months we’re seeing people in secondary and tertiary roles, the jobs which used to support the mining industry.
“Loss of income, persistent loss of income because they can’t get another job, under-employment once they get a new job and over-committal of credit from before they got their job.
“I think it’s going to continue for quite a while. I think what we are seeing is the knock-on effect of poor lending, bad market, downturn of jobs and that doesn’t peter out immediately.”
The situation is leading to a rising number of mortgage defaults, particularly in the mining states of Western Australia and Queensland.
Of the 10 worst performing postcodes across the country, six are in Western Australia and four are in Queensland.
If you extend out to the 20 worst performers, 15 of the spots are occupied by WA and Queensland.
There are also pockets of stress in Victoria and New South Wales.
Australia’s 10 worst performing postcodes for mortgage defaults
Default rate over 30 days
Source: Moody’s Investor Service, November 2017
“I think the community underestimates the fragility of so many families’ wellbeing and their financial situations,” said Mark Glasson, executive general manager of charity Anglicare WA.
The organisation has seen the demand for financial help rise 40 per cent on the same time last year.
“We knocked back more people than we saw, so there is a phenomenal number of people in financial hardship,” he said.
“Of those people about one in three, a little bit more than that, are in housing stress or mortgage stress in particular, so what we are finding is somewhere between six and seven people a day are coming to us needing help to sustain their mortgages.”
A perfect storm of rising mortgage costs
Credit Ratings agency Moody’s has predicted the situation will worsen as a growing number of interest only loans convert to principal and interest, adding about 30 per cent to monthly fees based on current interest rates.
About 40 per cent of all mortgages funded by banks during 2014 and 2015 were interest only, and many of them included clauses which stipulated homeowners would have to start paying principal payments after five years.
Throw into the mix flat wages growth nationally, underemployment on the east coast and stubbornly high unemployment in the west, and according to Keith John, founder of Pioneer Credit — which buys debt off the banks once people default on their loans — you have a perfect storm.
“A perfect storm in the sense of, and I think we’re seeing it play out now, really low retail sales and a general lack of consumer appetite, and … people are desirous to paying down debt but don’t have the capacity that they did a year ago, or two or three years ago,” he said.
“I don’t see it changing for some time. I don’t see a catalyst that’s going to change the unemployment or the underemployment rate, and [there] certainly doesn’t seem to be a catalyst that’s going to be any cause for a material uplift in wages growth.”
After spending most of his 25-year career in debt collection, Mr John believed there was a better way to help people suffering financial hardship.
“Our job is to help them through that situation and if we can help them through it well, then it will be a good outcome for them,” he said.
“If we do a good job, they will pay us. We need that obviously to succeed as a company, and if we do it really well, they’ll continue to shop with us, they’ll take out a personal loan with us once they’re back on their feet financially.”
Mr John said many people’s finances came unstuck when they encountered a major event in life.
“People generally look the same — that is, they live week-to-week on credit cards and personal loans going along quite nicely and then something happens: death, divorce, sickness, lost their job,” he said.
“Domestic violence is increasingly a challenge and that event causes them to re-shift their priorities and not be able to address their debt situation.”
The Australian dream hits reality
Anglicare’s Mark Glasson warned that Australians may need to rethink the Australian dream of owning their own home.
“I think the great Australian dream of buying your home is definitely something we need to reconsider,” he said.
Affordability and renting
For renting to become a truly viable, long-term alternative to home ownership, greater rental affordability and security is needed, writes senior research fellow Emma Power.
“I think we need to provide better for renters, we need to provide better long-term tenancies, we need to look at tenancy law to make sure [people] are protected when they’re renting.
“I think we need to be mindful, for many young people, they’re not going to have the option of owning a home.
“But we see a lot of people who see housing an an investment and that’s part of our difficulty — there’s accommodation there that people don’t have access to because it’s being used as an investment,” he said.
As for the Haydens, they are still hopeful of selling their house, and are now renovating a bus which will become their next home.