Chart reveals scale of Aussie mortgage crisis as low fixed rates disappear

An “alarming trend” in Australian mortgages could signal a new era of difficulty for a certain section of Aussie mortgage holders.

Since the RBA first started raising interest rates in May of last year, many Australians have been waiting for the other shoe to drop.

Amid the largest and fastest relative tightening of monetary policy in Australian history and warnings from the Reserve Bank that 14.6 per cent of borrowers would find themselves in negative spare cash flow at a 3.6 per cent cash rate, a rise in mortgage arrears, or overdue mortgage payments, has been long awaited.

Yet, as of the latest reporting season for the banks, we are yet to see an outsized rise in arrears. But there are some clear reasons as to why this cycle has been somewhat different to those seen in Australia’s past.

Shortly before the RBA started raising interest rates, a little under 40 per cent of borrowers were on fixed rate loans. According to data from the RBA, at the time the average interest rate on a three-year or under fixed rate mortgage was 2.22 per cent, while fixed loans with a term of over three years had an average mortgage rate of 2.45 per cent.

While we have started to see the bulk of fixed rate mortgages begin to roll off on to variable rates in recent months, 21 per cent of mortgage holders are still benefiting from pandemic low fixed rate mortgages according to Lendi Group Research.

Mortgage holders ahead of the game

According to a paper authored by the incoming RBA Governor Michele Bullock back in July of last year, over one third of variable rate mortgage holders would not see an increase to their repayments in a scenario of a 3.0 per cent rise in the cash rate. This scenario was based on how repayments and rates sat in May 2022.

While rates have risen by 4.0 per cent, not the 3.0 per cent envisioned in the RBA scenario, a sizeable proportion of mortgage holders remain well ahead on their loans.

Between fixed rate loans and those ahead on their mortgages, more than half of all mortgage holders have been insulated from rising rates to some degree over the past 12 months.

Historical precedent

To put the performance of Australian mortgage arrears thus far into perspective, we’ll be comparing them to those of the US during the era leading up to the subprime crisis and eventual housing crash from the time rates started rising.

Naturally, lending standards in the US were far below what we see in modern Australia, but the comparison may prove helpful in illustrating the lag between rising rates and serious difficulty for borrowers.

In June 2004, the US Federal Reserve started raising interest rates and the delinquency rate on American residential mortgages was 1.6 per cent. Over the next two years interest rates would rise by 4.0 per cent, in the largest rate rise cycle since the 1980s. By the time the Federal Reserve finished raising rates, mortgage delinquencies had risen by just 0.02 per cent. Over the four years that followed the delinquency rate would rise by over 600 per cent, until in the first quarter of 2010, 11.5 per cent of US mortgages were in arrears.

Signs of stress at the margin

While there isn’t much sign of rising mortgage arrears at the major banks as of yet, at non-bank lenders it’s a very different story. At Pepper Money, 1.2 per cent of mortgages were 90 days or more in arrears. At Liberty Financial the figure was 1.5 per cent.

Meanwhile, the average rate of 90 days in arrears at the major banks who have reported recent results is 0.47 per cent.

But as you might imagine, not all mortgage holders are sharing the same experience. Research and asset management firm Bond Adviser recently produced an analysis on how mortgage holders were fairing based on when the mortgage was originally written.

These mortgages are from ‘Prime borrowers’ (high quality) and packaged together into an investment product called a residential mortgage-backed security (RMBS). The data showed that mortgages written in 2021 and in particular 2022 had a significantly higher delinquency rate than the average.

Alarming Australian Prime RMBS arrears trend. Sore thumb of 2022 vintage remains. 2021 vintage has sharply ticked up also. #ausecon#ausbiz#rmbs#rba#housingmarket@BondAdviser@j_likospic.twitter.com/gEI1jFIuuO

— Charlie Callan (@charliecallan_) June 14, 2023

Signs of stress

While mortgage arrears remain low in aggregate, there are potentially other signs of households finding themselves in difficulty. In a recent note accompanying the latest new and overall listing volumes CoreLogic had this to say: “Anecdotally, we may also be seeing more homeowners needing to sell amid a peak in the ‘fixed rate cliff’, elevated interest rates and high cost of living pressures.”

This theory is arguably supported by data showing that new listings have surged above their five-year average in Sydney (22.6 per cent above) and Melbourne (25.5 per cent above), while almost all the other capitals and regional areas in aggregate have new listing volumes below the five-year average.

With Sydney and Melbourne first and second for the largest mortgages in the nation, it makes a degree of sense that new listing volumes would surge there first.

On the other side of the coin, overall housing stock on market remains 25.7 per cent below its five-year average nationally and 20.7 per cent below its five-year average in the capitals. This trend is particularly strong in Brisbane, Adelaide and Perth, where total listing volumes are between 40.1 per cent and 44.9 per cent below the 5 year average.

While there are signs of new listing volumes surging in some locales, its going to take time before markets reach a more normal pre-pandemic level of equilibrium between supply and demand.