Digital Finance Analytics household survey data to the end of December 2023 reveals that there has been a further small rise in household financial distress, to another new record.
This is explained by the perfect storm of high inflation (though moderating it remains well above RBA targets), a decline in real household income, and the significant rise in interest rates imposed by the Reserve Bank, coupled with bigger loans chasing higher home prices, higher rents, and record level of migration.
While there have been some mitigations, with low pay rising, banks being open to extending mortgage terms, and some spot government assistance, (for example rent assistance and electricity support for some), the die is cast for a continued period of weak growth, falling real incomes, and so more distress ahead.
It is worth noting that Australian hold a record amount of debt relative to income, which means society is more exposed to the dynamics of higher mortgage rates.
That said, not all households are equally impacted. Around half of mortgage holders, and over seventy percent of renters registered as stressed in our modelling, based on cash flow pressures.
As the RBA highlighted recently, these are the earliest signs of stress, which can sometimes morph into missing payments and event defaults later – often over a period of several years.
We also note that household savings ratios continue to decline and that more households are attempting to work more hours to get by.
The key to how this all plays out will depend on the trajectory of the unemployment rate, coupled with the future moves in the RBA cash rate – the latter is unlikely to drop over the bulk of 2024, based on our current assumptions.
There are many different definitions out there (from 30% of income, or taxable income; through to underwriting metrics) but we define stress in cash flow terms.
If households have more outgoings (excluding one-off discretionary items) than income, we define them as stressed. If they have a mortgage, they are in mortgage stress; if renting then rental stress.
Investors with cash flow pressures are identified as stressed investors.
We also aggregate the data to estimate total financial stress.
Each is expressed as a percentage of households, and count. The latter is the best measure in our view.
Here are the high-level results.
Note the RBA updated their debt to disposable income ratios again in September 2023, and the true picture is significantly understated because only one in three households has an owner-occupied mortgage, thus the 185.4 ratio should be tripled to provide a more realistic measure of the ratio of debt to income.
Indeed, we see many new loans being written at 6x incomes and more, as home prices are being chased higher.
Here we examine our data by the cohort identifiers and show that different segments are aligned to specific types of stress. For example, Young Growing Families, which includes first-time buyers, has the highest proportion of stressed households.
Among renters, the first generation Australians (Multicultural Establishment) have the highest exposure to rental stress, while more affluent households are more exposed to property investment stress.
Top Post Codes – Mortgage stress
The highest counts of mortgage stress are occurring in high growth corridors around major cities and in some regional centres. This aligns with recent purchases, and home-land packages, and is exacerbated by the Government’s Home Builder scheme.
Finally, we also present our assessment of prospective defaults over the next 12 months, sorted by count of defaults. Once again, we see a correlation between high-growth corridors and highly leveraged borrowers.
Scenarios are a way of exploring different futures, and considering the consequences, not as a forecast, but to facilitate understanding and debate.
None of these scenarios may turn out to be right…. Things change.
We use a framework driven from our core market model and we are going to look at three potential outcomes, updated with the latest data and results.
The scenarios running forward from today.
Best: Goldilocks Zone – rates stay at 4.35% but fall through 2024, and inflation eases ahead of RBA expectations, while wages rise faster. No recession in Australia. Migration remains above average.
Base: Soft Landing – rates rise to 4.6% (means mortgage rates 6.95-7.5%), stays high into 2024 while inflation stays above target until 2025, no recession in Australia. Migration falls to average.
Worst: Nightmare – rates rise to above 4.6% (mortgage rates 7.5%+), stay high into 2024 along with inflation, while unemployment rises and wage growth stalls due to recession here and rates fall later. Migration drops below average.
We continue to expect additional stress momentum, thanks to the higher interest rates, inflation, and falling real income.
In addition, government policy on migration, and tax policy (freezing tax brackets, for example), are having a severe impact.
There is nothing on the horizon suggesting relief from higher rates. So, we expect the RBA to keep rates higher for longer.
Individual households would do well to analyse their cash flows, prioritise spending, and check they have the best rates available on their loans and savings. Renters would be advised to seek out longer term rental agreements to avoid short term rental hikes.
Those in difficulty should speak with their lenders, who are obliged to assist via their hardship schemes.
But we are now seeing a rise in forced sales, and defaults, factors which may put pressure on home prices, despite the sky-high migration rates currently in force, and which will put more pressure on the markets.
While the RBA is intending to slow the economy by putting more pressure on households via higher rates, the high migration settings are frankly a disaster.