How interest rate rises could tip households into mortgage stress

Updated

Australia's housing market has reached a unique point in its history: household debt at a record high, interest rates at an all-time low.

It's a "perfect storm" that means mortgage stress will spread swiftly, even with small increases in interest rates, according to mortgage industry expert Martin North.

Already, one in four mortgaged households are in stress — meaning they do not have enough income to cover mortgage repayments and other living expenses.

North's modelling shows how this figure would rise — and which neighbourhoods would be hit hardest — if interest rates were raised. It is based on research by his highly-respected consultancy, Digital Finance Analytics, which has surveyed the finances of 52,000 households a year for more than 10 years.

How much can interest rates rise?

The current interest rate, also known as the official cash rate, is at a record low 1.5 per cent. (The rate charged on home loans is generally 3-4 percentage points higher.)

Most experts agree that, sooner or later, interest rates will have to rise, although it is not clear by how much or how quickly.

The Reserve Bank has signalled that a "neutral nominal cash rate" is 3.5 per cent, implying that there could be a 2 percentage point increase in the cash rate to balance inflation and economic growth.

Small changes, potentially big effects

At current interest rates, more than 820,000 households are in mortgage stress, with those in regional and remote areas more likely to affected.

This chart, based on Digital Finance Analytics' modelling, shows how mortgage stress would spread if interest rates were increased by up to 5 percentage points. While an interest rate rise above 2 percentage points is widely seen as unlikely, the official cash rate topped 17 per cent in 1990 and most recently reached 7 per cent in 2008.

The line climbs steeply at the beginning, showing how quickly stress spreads, even with small rate increases. This is North's "perfect storm": the combination of flat incomes, soaring house prices, high household debt and low interest rates.

"You only need a small consequential change … to actually really create that pain point," North said.

"We've got households in some degree of difficulty already now, so it doesn't take much to see the tipping point. Then we get this downward spiral and, if it goes, it could be as bad as Ireland or the US. It's a house of cards, I think."

The potential economic ripple effects could go beyond homeowners and investors as millions of households cut back their spending and load up on debt, dragging down the wider economy, North said. Some will scramble to refinance or sell. Others may lose their homes.

Which suburbs would be hit hardest?

If interest rates rise by just half a percentage point, mortgage stress would jump from an average of one in four mortgaged households to one in three. That's more than one million households.

If interest rates rose by one percentage point, mortgage stress would be as common in cities as it in the country, according to Digital Finance Analytics' modelling.

Across the country, nearly 40 per cent of mortgaged households would be in financial stress, while in some postcodes, the figure would climb past 80 per cent. These include:

2105 (Church Point) in Sydney

3008 (Docklands) and 3036 (Keilor) in Melbourne

4102 (Buranda) and 4153 (Burbank) in Brisbane

6017 (Osborne Park) in Perth

A rise of two percentage points would push half of all mortgaged households — or 1.6 million households — into financial stress.

Mortgage stress would become almost as widespread in wealthier neighbourhoods as in mainstream suburbia or the low-income urban fringes.

In more than a dozen capital city postcodes, 90 per cent of households or higher would be in stress. These include:

2150 (Parramatta), 2197 (Bass Hill), 2141 (Lidcombe) and 2128 (Silverwater) in Sydney

3060 (Fawkner) in Melbourne

4103 (Annerley) in Brisbane

6148 (Riverton) in Perth

In Prime Minister Malcolm Turnbull's postcode, 2027 (Point Piper, Darling Point), 11 per cent of households would be in mortgage stress.

To see how your neighbourhood would cope with interest rate rises please view this story in your mobile browser, as the following interactive story will not display properly in the ABC app.

These 1,955 circles represent Australia's mortgaged homes.



1 circle = 1 postcode

Bigger circle = More mortgaged households

Mortgage stress is defined as when a household's income doesn't cover its outgoings, including mortgage repayments.



This is a higher threshold than in most analyses.

At current interest rates, more than 820,000 households are in mortgage stress. That's an average of one in four.



But averages hide a lot.

At one extreme are postcodes where less than 10% of mortgaged households are in stress.

At the other, are those where at least 90% are in stress.

Most of those postcodes are in regional and remote Australia. Mortgage stress is worse here than in major capital cities.

Let's see what happens if interest rates rise by 0.5%. (They were last at this level in May 2015.)

Mortgage stress jumps from one in four mortgaged households to one in three.

The combination of flat incomes, rising costs and large mortgages means stress spreads quickly, even with small rate changes.

More than 170 grey postcodes slide further into stress, taking 330,000 mortgaged households with them.

Nearly half are in cities.

This is what a 1% rise on current rates looks like. (Interest rates were last at this level in August 2013.)

The number of metropolitan postcodes with more than 40% of mortgaged households in stress nearly doubles.

In some, at least 80% of mortgaged households are in stress.

A 2% increase from current rates throws half of all mortgaged households into stress. (Interest rates were last at this level in June 2012.)

Both rich and poor are now under pressure.

The burden shifts away from regional Australia. In the country, stressed households are more likely to be in the minority in their postcode.

The opposite is true for cities.

In Melbourne, Fawkner becomes the largest postcode to hit 100% mortgage stress. It is home to nearly 1,400 mortgaged households.

In Sydney, Silverwater and Kurnell also hit 100%. In these areas, virtually every mortgaged household is in stress.

Let's see what happens if interest rates rise by 3%.

Most analysts think rises above 2 percentage points are unlikely. They were last at this level in November 2011.

These metropolitan postcodes represent 65,000 mortgaged households. At least 90% are in stress.

These represent 5,000 mortgaged households. Only 10% or less are in stress.

A 4% increase above current rates would bring interest rates roughly in line with the average over the past two decades.

(They were last above this level in October 2008.)

More than two million households are in stress.

Mooloolaba becomes Queensland's first metropolitan postcode to hit 100% mortgage stress, while Buranda and Northgate are close behind.

In many of the nation's largest postcodes, more than 80% of mortgaged households are in stress.

In some of the worst-affected areas, there are more than 10,000 mortgaged households.

This is what mortgage stress looks like at 5% above current rates.

The last time interest rates were close to this level was March 2008.

Prime Minister Malcolm Turnbull's postcode, 2027, is among 20 metropolitan postcodes with less than 20% of mortgaged households in stress.

Meanwhile, across the nation, more than 170 metropolitan postcodes have at least 90% of mortgaged households in stress.

How will your neighbourhood cope if interest rates rise?

Data notes: Digital Finance Analytics' model combines the results of an annual, nationally representative telephone survey with public and private data from more than 120 sources, including the Reserve Bank of Australia, Australian Prudential Regulation Authority and the Australian Bureau of Statistics

Analysis of neighbourhood types is based on the most common type of household in a postcode

Postcode names are indicative. Many postcodes include multiple suburbs

Data for postcodes with fewer than 200 mortgaged houses should be treated with caution

Topics: housing, house-and-home, housing-industry, consumer-finance, banking, business-economics-and-finance, australia, nsw, vic, tas, sa, qld, nt, wa, act

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