Digital Financial Analytics principal Martin North says that a shake out in the property market would not be restricted to lower income areas and would include households in the trophy suburbs of Bondi and Lane Cove in Sydney as well as homes in the leafy green streets of Toorak and Prahran in Melbourne.

"The common theme here is affluent households paying top dollar for apartments with big mortgages and the potential to be caught out by rising interest rates and flat or falling incomes. Even places like the lower north shore are being hit" he said.

Under the modelling performed by Digital Finance Analytics, there are around 650,000 households in Australia experiencing some form of mortgage stress. The numbers are consistent with a Roy Morgan report from September 2016 that showed one in five households were experiencing mortgage stress.

The longstanding measure for mortgage stress has been 30 per cent of household income.

It's better to trim your sails than suffer mortgage stress or worse, a distressed sale. Louise Kennerley

Mild mortgage stress might see household cut back on childcare expenses, dipping into savings or reaching for the credit card in order to make payments. Severe mortgage stress indicates that the mortgage holder has missed a payment or payments and is already considering selling the property.

If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.

Professor Roger Wilkins of the Melbourne Institute at the University of Melbourne produces the Household Income and Labour Dynamics Survey, regarded as one of the best sources of information about housing affordability in Australia.


He says that while mortgage stress hasn't materially increased in recent years that a sharp rise in interest rates would be destructive to household finances everywhere.

More than one-fifth of mortgage holders were already in some form of stress in March. If lending costs rose, so would stress levels.

"If the cash rate goes to 6 per cent then you would expect to see a lot people in strife. Particularly with wage growth and inflation at such low levels so that does increase vulnerability to rises to interest rates" Mr Wilkins said.

Experts however are split on the likelihood of an economic downturn the magnitude of which the OECD is predicting from its European headquarters.

Independent economist Saul Eslake said that while the risks they have outlined shouldn't be downplayed, a broad rout in the property market was only likely to occur if large numbers of forced sellers were adding to an already oversupplied market.

Australian mortgage holders have proven to be resilient in the face of interest rate rises as shown in in 2007 and 2008 when rates rose, Mr Eslake said, with the majority of debt held by higher income households who can afford repayments.

Mr Eslake believes that the scenarios the OECD is putting forward are more likely to come from the risk around the potential for oversupply in the apartment markets of Melbourne and Brisbane rather than from a sudden and large rise in interest rates or unemployment.


Financier 'Aussie' John Symond weighed in on giddy house prices this week saying that investors and speculators were driving up prices and were contributing to an oversupply of rental stock.

"More investors have been buying properties than owner occupiers, which means there's more rental properties on the market looking for tenants. The supply-demand equation has moved in favour of renters, purely on a supply-demand basis."

Many believe this surge in investor buying is driven by record low interest rates which have squeezed yields to historic lows – in Sydney they are now just 2.9 per cent down from 4.4 per cent 5 years ago.

And if prices continue to rise yields will, conversely, continue to go down.

Macroplan chief adviser Nigel Stapledon said during the last housing boom in Sydney yields hit very low levels but then interest rates started to rise, investors and speculators then started to back out of the market softening prices and sending yields back up.

In some places this is already happening.

In Melbourne investors buying apartments for student accommodation are getting yields of up to 8 per cent, partly because apartment prices are falling as banks tighten lending for fear of an oversupply of apartments in general and also due to regulatory requirements.


Stephen Fitzsimon, head of business development for Melbourne Real Estate, which rents more than 1000 apartments in Melbourne's central business district, said the price of a small apartment purchased eight to 10 years ago had fallen about 10 per cent to $210,000.

Demand for accommodation from overseas students however was "off the charts" and "continues on an upwards trajectory", particularly from China and India.

Strong demand has made student apartments popular with cashed-up self managed super fund investors and retirees looking for yield.

But in Sydney this is still yet to happen.

Yellow Brick Road Holding executive chairman Mark Bouris said prices will keep rising even if interest rates have started to tick up a bit. "I think price increases will outstrip rent increases for the next 2 years or so in this low interest rate environment," Mr Bouris said.

"Renters ability to pay higher rents is dependent on wages and wages have not increased for a few years so the propensity to increase yields isn't there."

But with interest rates starting to rise again, yields could rise without rental demand.