Report claims 40% of first home owners in mortgage stress

About 40% of first home owners are currently experiencing some type of mortgage stress, with that number set to rise to 50% by the end of the year, the latest Fujitsu Australia Mortgage Stress Report has revealed.

The report, which uses a rolling sample of 26,000 households across the country, has found that affordability has become a major issue for first home owners who entered the market last 18 months lured by the Government’s grants.

The number of households experiencing some degree of mortgage stress rose by 0.7% to 581,000, compared to a peak of 900,000 in August 2008.

However, the number of households under severe stress, which is categorised as those facing a potential sale, closure or forced refinance, grew by another 2%. At least 218,000 households are at risk of having to sell, refinance or foreclose.

The main factors of high mortgage stress include rising interest rates, cited by 11% of households, whereas cost of living increases were only cited by 3.4% of homes. Fears of unemployment fell by 6%, with redundancy fears also falling 1%.

Fujitsu expects the number of first home buyers experiencing mortgage stress who entered the market within the last 18 months to reach 124,950 by the end of the year.

Martin North, managing consulting director of Fujitsu Australia, says these first time buyers entered the market without considering how quickly interest rates could rise.

“We knew interest rates were going to go up, but we expected them to rise much more slowly and many first home owners expected incomes to rise as well. Of course, that isn’t happening, and coupled with the increase in home loan sizes of about 40%, affordability is quite low here compared to the US or Britain and it’s not getting any easier.”

North says the first home owners market is going to be hit the hardest, with half of all new owners likely to experience stress by the end of the year. He says the market is actually working against them, with high prices exposing them to interest rate increases.

“In the report we outline the system we use, we don’t use a generic ratio of income to mortgage repayments. We ask about their ability to repay, whether they make payments on time, are they putting the mortgage payment on credit cards, etc. That is mild stress. The people not able to make repayments, thinking of refinancing, those are people in severe stress and that number is rising.”

“This is the untold story of mortgage stress. The number of distressed sales in Australia is quite high but no one records it because it isn’t an official statistic.”

Across the market, North says the high level of mortgage stress is partly due to high prices in property, and agrees with recent comments from the Reserve Bank suggesting there is a massive housing shortage.

Additionally, he says mortgage stress will continue due to sustained demand for property caused by the growing population, which will continue to push up prices for the foreseeable future.

“What needs to happen, then, is that we need a good hard look at how we address the supply side issues in this country. Builders aren’t able to get funding, the states aren’t working fast enough.”

“Investors are back in the market in a big way, there is a growing population, and there is high demand. It’s the worst situation where there is housing undersupply, and that is going to continue for some time.”