Navigating Mortgage Transitions
After six months, we are now in the projected peak transition period, lasting three months, during which most COVID-related loans are set to expire. August's performance in the housing market offers insights into this crucial phase.
This note provides an overview of housing market risk, particularly with the expiration of fixed-term facilities created during the pandemic. Economic activity and housing momentum have slowed due to higher interest rates for all mortgage holders, and a noteworthy increase in new property listings has been observed by CoreLogic. Despite these challenges, Australia's large mortgage market is expected to maintain resilience, thanks in part to the tight labor market.
The fixed-rate risk arises from the upcoming expiration of numerous fixed-rate loans, potentially causing difficulties for some borrowers to afford the higher variable rates. Fixed rates with short terms had hit a low of 1.95% for owner-occupiers in May 2021, while new owner-occupier variable rates are now at 5.66%. This leads to a substantial increase in monthly mortgage payments, illustrating a nearly 60% rise. The August Monetary Policy Statement provides insights on fixed-term loan expiries, highlighting their limited proportion in outstanding credit. Despite the surge in fixed borrowing during COVID, the majority of housing debt is on variable rates. Variable rate borrowers have already felt the impact of cash rate increases, with approximately 80% of the June 400-basis point hike affecting them. While these rate hikes and living costs have strained variable-rate mortgage holders, data indicates that arrears are under control and property value increases have likely reduced the prevalence of underwater loans.
The most recent APRA quarterly report indicates that housing credit risks remain under control. Arrears in housing credit are minimal, standing at 1.2% of outstanding debt, with non-performing credit at 0.7% for mortgages overdue by 90 days or more. Slightly delayed data also shows that payments in the early stages of being late, between 30 and 89 days, are at 0.5%. Although there has been a slight rise in repayments in arrears from a low of 1.0% in the September quarter of 2022, the figure remains below pre-pandemic levels, at 1.6% in the March quarter.
However, this data might not provide an immediate picture of mortgage stress. The APRA data has a small time lag (June quarter data will be available in early September), and the measurement of late payments introduces an additional delay in the data. People facing challenges with increased housing costs often prioritize housing payments and may take some time before actually missing a payment. Major bank representatives reiterated during recent parliamentary hearings in July that home loan borrowers continue to show resilience, with a low proportion of late payments.
Recent economic and housing data underscore the tangible impact of rising interest rates, as evident from various indicators reflecting the effects of housing and living costs on borrowers. In August, the Westpac-MI consumer sentiment index dropped by -0.4%, with mortgage holders experiencing a more pronounced -7.2% decline. Furthermore, the slowdown in payments into offset and redraw facilities, previously on the rise during the COVID period, reflects a shift toward directing more funds towards interest payments. This is accompanied by a reduction in household savings to 3.5% and a -0.5% decrease in retail spending during the June quarter. Housing metrics also depict signs of weakening, with the CoreLogic Home Value Index's growth decelerating from 1.1% in June to 0.6% in July, and a downward trajectory in clearance rates. An intriguing development is the unexpected surge in new property listings in July, deviating from the customary seasonal pattern, which might indicate motivated selling due to mortgage repayment challenges or anticipation of upcoming mortgage serviceability problems linked to a significant number of expiring fixed-term facilities later this year. Yet, this trend could also be attributed to improving home values and selling conditions, prompting decisions deferred during the previous market decline, along with sellers looking to get ahead of the competitive spring selling season. While not solely indicative of forced selling due to higher mortgage costs, the rise in new listings remains a pivotal metric to monitor as an increasing number of mortgage holders navigate the landscape of elevated interest expenses.
The official data on mortgage stress indicates that despite the expiration of low fixed-term loans, arrears haven't significantly increased, thanks to rising home values which have kept default risks low. However, the final RBA rate hike's impact on households, coupled with an increase in new listings decisions, might lead to a mild decline in housing market conditions. On a positive note, this economic slowdown could bring the RBA closer to its inflation target, potentially prompting a cash rate reduction in the latter half of 2024, in line with predictions from major banks.
Source: https://www.corelogic.com.au/news-research/news/2023/are-we-there-yet-a-fixed-rate-cliff-update