Due to the high costs of living compared to income growth, new research by Digital Finance Analytics (DFA) reveals overall rental and mortgage stress have both hit new record highs at 72.97% and 50.2% respectively.

Based on its rolling 52,000 household survey to the end of October, DFA analysis suggests real gross household disposable income per capita has fallen by an average 5.1% in Australia in the last 12 months (compared with recent OECD reportings).

“If households have more outgoings (excluding one-off discretionary items) than income, we define them as stressed,” said DFA’s principal Martin North.

“Overall, financial stress (the aggregate measure) continues to rise, with 49.64% (or more than 4.84 million households) having cash flow issues.”

Who’s feeling the pain?

Rental stress moved up in all states during October.

While mortgage stress accelerated in NSW, QLD and VIC in the month, DFA data reveals it is now highest in VIC, followed by NSW and WA.

What’s evident within the data, adds North, is that mortgage and rental stress is concentrated among younger households, including many first-time buyers, as well as first-generation migrants.

As expected, DFA data suggests high-stress post codes translate to default risk.

But that said, lenders are extending additional support to many households to avoid a default outcome, which North attributes to keeping real levels of default lower than might be expected, at least for now.

“We continue to see a concentration of investor stress among more affluent households… rental stress remains highest among recent migrants,” said North.

“The observation more generally is that all household segments are under more pressure. Note on this chart, the yellow highlights are picking out the largest percentages, not changes from last month.”

Mortgagee sales may rise

According to DFA data, the top post codes by count, for mortgage stress, rental stress, investor stress and financial stress reveal significant concentration in the high growth corridors, where many recent highly leveraged households are now exposed.

With mortgage rates expected to remain higher for longer, given the stubborn nature of inflation, North doesn’t see any turnaround in heightened rental and mortgage stress trends any time soon.

“More households are having to trim their spending and prioritise mortgage and rental payments, over other categories, such as food or medical expenses,” said North.

“So as households spend more time in deficit, they will eventually have to take more drastic steps, including potentially selling their property… but this will take months to work through.”

Homeowners are adjusting

Interestingly, despite a rise in overall rental and mortgage stress, a rise in distressed sales is yet to happen.

Recent Domain figures (see below) showed a clear decrease in distressed listings across the capital cities, with the sharpest decline coming from Brisbane, with a 2.4 point decrease from 6.6%.

Here’s how the other states faired:

  • In Sydney, only 3.3% of listings were from distressed sellers, compared to 4.7% at the same time last year.
  • In Melbourne, it was down 0.4 percentage points from 2.0% in August 2022.
  • Hobart and Darwin were also down 0.4 points from 1.1% and 5% respectively.
  • Perth experienced a 1.3 point decrease from 3.7%.

Despite household budgets being squeezed, Domain chief of research and economics Dr Nicola Powell attributes the capital city containment in the level of distressed listings to homeowners adjusting to financial circumstances to meet mortgage repayments.

“Our housing market is into recovery, so when somebody does need to sell, the likelihood of them actually selling for less than what they purchased is actually diminishing over time,” said Powell who expects the number of distressed listings to continue to shrink as the market recovers further.