Mortgage stress strikes a third of all home loans

Patrick Commins and Chris Vedelago | The Age | July 15, 2012
http://www.theage.com.au/victoria/mortgage-stress-strikes-a-third-of-all-home-loans-20120714-2236l.html
Three in every 10 households with a home loan are suffering mortgage stress. Figures provided by the Bureau of Statistics to The Sunday Age suggested a grimmer picture of Australians’ finances than had been painted by data released in recent weeks as part of the 2011 census.
One in 10 households were reportedly paying more than 30 per cent of their gross income to meet mortgage repayments – a widely held threshold beyond which a borrower was deemed overstretched. But the bureau confirmed that this was the proportion of all households, including those who were renting or owned their homes outright. Including only those with mortgages, the proportion of stressed borrowers tripled.
The new figures came as the Reserve Bank’s double interest rate cut apparently failed to halt the downturn in Melbourne’s property market, leading some analysts to predict the slump could worsen as buyers remained nervous.
Prices fell for the fifth consecutive quarter in June, which has so far wiped $45,000 off the city’s median house value in just over a year.
It marked the worst run for the Melbourne property market since the recession of the early 1990s, according to analysts Residex.
The grim outlook has been challenged by other industry groups, who argued that sentiment was beginning to improve and the full effects of the interest rate cuts were yet to be felt.
The controversy has been fuelled by conflicting property price data produced by competing analysts groups, which have variously suggested that Melbourne’s property market could be in recovery, holding steady, or headed for a prolonged slump.
The debate comes as the auction market posted its worst performance of 2012 last weekend, with 52 per cent of properties going under the hammer finding buyers.
Yesterday, the clearance rate rose to 60 per cent – close to the average for the year – but the outcome of several dozen auction results are yet to be disclosed.
Residex chief executive John Edward warned that Melbourne home owners should brace for further price falls as it had become clear that buyers weren’t being tempted by sharp interest rate cuts.
”Everyone thought the housing market would react positively to the 50-basis reduction in May, but that’s proved wrong. The Reserve Bank’s action, which was in response to negative international events, has just made people more cautious. They’ve been spooked and they are becoming more and more risk adverse.”
House prices fell 1.3 per cent to $555,500 in the past three months – and are now down 7.5 per cent from their peak – returning the city’s median value to a point not seen in more than two years.
On mortgage stress, lenders moved to more sophisticated lending models more than a decade ago. They examine a borrower’s capacity to repay based on whether there was any remaining income after subtracting proposed mortgage payments and expenses.
The result was a more nuanced approach to lending, which also allowed banks to lend well above and beyond the traditional 30 per cent threshold.
HSBC chief economist Paul Bloxham pointed out that 70 per cent of the total housing debt in Australia was held by the richest 40 per cent of households. ”If you have a loan-to-value ratio of more than 80 per cent and are putting more than half of your disposable income to repaying your home loan then you are more vulnerable,” Mr Bloxham said.
Mortgage lending rates have also declined sharply after the Reserve Bank cut the official cash interest rate by 1.25 percentage points in eight months.
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