Property experts warn rise in mortgage defaults points to first home buyer stress

The property industry is becoming worried over a rise in the number of delinquent mortgages as reported by ANZ and Westpac in their half-year results this week, warning home buyers are desperate for long-predicted income growth that will help them manage repayments.

The figures released by the two banks come just two months after a Fitch report found the number of delinquent mortgages in Australia rose during the third quarter of 2010, with 90+ day arrears reaching 0.54%.

A separate report released at the same time by the Real Estate Institute of Australia found the average proportion of income now required to meet repayments has risen to 35%.

Yesterday Westpac released its half-yearly financial results, and showed that the number of 90-day delinquencies has risen to 59 basis points, up from 47 basis points in September 2010. ANZ also said it has recorded a rise in the number of delinquent mortgages.

Property experts say the rise in defaults is worth taking note of.

“This is something that we should keep an eye on,” Housing Industry Association economist Matthew King says. “This emphasises the serious affordability constraints we have in the Australian marketplace.”

Australian Property Monitors economist Andrew Wilson agrees, and warns that the huge surge in prices in both Melbourne and Sydney has meant first home buyers are struggling with repayments.

“There was a surge in demand of those markets, and perhaps we had prices moving ahead of incomes in those markets.”

This is the explanation provided by Westpac chief executive Gail Kelly and chief financial officer Phil Coffey, who said that mortgages tend to slip into default about three years into the loan cycle. Both explained Westpac had sold a large number of mortgages between 2007-09.

These experts agree, and say the number of first home buyers who purchased properties when prices were already inflated are now finding it hard to make repayments, as tighter employment conditions have not yet translated into higher wages.

“We haven’t yet seen that upward movement in wages, and we’ve only started to see growth in that area,” King says. “Now, there is a broad expectation that this is going to happen, but we still haven’t seen it.”

Wilson says the property market is now in a period of transition, as prices begin to fall and home owners start to adjust as their incomes rise.

“The other end of the equation here is the cost of finance, because we’ve seen about seven interest rate rises throughout several months up to November, and then an additional one for Westpac buyers. So that affects their position as well.”

Both experts warn that because it is taking so long for wages to catch up, there will be more delinquencies in the months ahead – especially as figures from the REIA show the average mortgage payer is devoting over 35% of their income to repayments.

Gail Kelly herself predicted this yesterday, saying that while delinquencies were artificially increased by the natural disasters in Queensland, the bank still expects arrears to rise.

“We expect to see an increase in stress and more in the way of customers requiring assistance, customers requiring bridging to actually navigate their way through that,” she told the Australian Financial Review.

However, she also noted that overall the market is performing well and the delinquencies won’t result in a loss. Both these experts also say overall, delinquencies are quite low.

However, King says the prospect of other interest rate rise in the next few months will also make matters worse for home buyers, especially first home owners who bought when prices were already high.

“We certainly do hope that wages catch up, and that seems to be the case as the labour market is set to strengthen even further.”

“But if they didn’t, we can see that the first home buyers would be the hardest hit. Many would suffer a significant loss and move back into the rental market, which is tight already.”

Wilson says the same, and argues the labour market will ensure those suffering mortgage stress will be given reprieve when incomes increase. However, he does say this situation provides evidence of what the property market will look like over the foreseeable future.

“We don’t have a linear housing series anymore. These things come in ebbs and flows, and I don’t think we’ll ever have a boom and bust cycle in this country again. We’re seeing more of a time when prices and incomes will need to adjust over time.”

However, despite these comments, financial institutions are alarmed over the rise in delinquencies.

According to the AFR, UBS has told its clients that “the sharp rise is an ominous lead indicator for the domestic economy”. Morgan Stanley also noted that “the combination of arrears trends… suggests that Australia’s operating conditions are no longer improving because the “two-speed” economy is weighing on households and businesses”.