Growing mortgage delinquencies add to the property bubble debate

As the great property debate continues to rage, with some predicting an impending crash due to over-inflated prices and ongoing affordability issues, a new report reveals that mortgage delinquencies are on the rise as more Australian home owners struggle to keep up with repayments and the rising cost of living.

According to the Fitch Ratings 30-plus day Dinkum Index, which measures 30-day arrears, more home borrowers fell one or two months behind on payments in the last quarter of 2010 and have been unable to cure their delinquent status into the first quarter of this year.

In an article published in The Australian, associate director in Fitch’s Structured Finance team James Zanesi said, “Mortgage performance is also expected to worsen in (the first quarter) driven mainly by the usual impact that the Christmas spend has on first quarter mortgage performance.”

He added that the November rate hike by the RBA and the impact of the flooding in Queensland might also impact delinquencies.

The report has added fuel to the “housing bubble’s going to burst” fire, with many bloggers suggesting our property markets are in for an almighty bust.

Of course if you’ve been following my blogs you know I disagree and I’ve given my reasons why I don’t think our property markets are in for a crash in last week’s blog.

Don’t get me wrong…

I know the average Australian house is expensive according to world standards. That’s because it is valuable – which doesn’t mean it’s overvalued.

But is the average property really unaffordable?

Well that depends… While it may be unaffordable to first home buyers (as has always been the case); the average property is not unaffordable to most existing home owners. Otherwise they wouldn’t be buying these properties, would they?

Remember, only 30% of properties are owned by investors.

The vast majority of all homes in Australia (70%) are owned by mums and dads – homeowners who are paying off or have paid off their mortgage. In fact, close to 50% of homeowners have no mortgage at all.

Even if house prices were unaffordable does this mean property prices will crash?

I see no reason why this should happen. Let’s put things into perspective…

Sure, many Australians have taken on debt to get into the property market, but most homeowners are responsible with their debt. The mortgage default rate in Australia, at around 1%, is very low by world standards.

According to Paul Bloxham, HSBC’s chief economist, 75% of all household debt in Australia is held by the top two-fifths of income earners.

He further explains that vulnerable households – ones that have a loan-to-valuation ratio of 90% or above and also use more than 50% of their disposable income to service their mortgages – constitute less than 2% of all owner-occupied households with debt in Australia.

Unlike overseas we have a strong banking system and responsible lending criteria. Not only is the level of defaults very low, but many Australians are currently paying higher loan repayments than necessary to give themselves some financial buffers while others have chosen to fix a part of their loans to protect themselves from rising interest rates.

Add to this the strong fundamentals supporting our real estate market (our strong economy, a mining boom, full employment, rising wages, strong population growth, low vacancy rates, an undersupply of dwellings and rising building costs) and there is no reason for our property market to crash.

Having said that I see a reasonably flat property market in the months ahead when some fundamentals that got out of kilter catch their breath.

By the way, there are still plenty of affordable properties in Australia. Just go to some small regional towns, mining towns or many holiday locations in northern Queensland. It’s just that most people don’t want to live in many of these locations.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.