Rate hikes hitting homeowners

A SHARP rise in mortgage arrears provides a clear indication of how nine consecutive interest rate rises have affected Western Australian homeowners.

By December 2022, about 2 per cent of WA borrowers were behind on payments, according to Australian Securitisation Forum data tracking residential mortgage-backed securities.

That’s up from about 1.4 per cent six months earlier (see chart).

Source: Australian Securitisation Forum, Bloomberg

WA has been through periods with higher arrears, but this sharp uptick has come as other states have plateaued.

A different set of data, from credit agency Illion, also suggests a growing cohort of WA homeowners are behind on their mortgages, rising from 0.78 per cent in September to 0.87 per cent in December.

That indicates the number of WA households behind on repayments was almost 50 per cent higher than the national average, Illion head of modelling Barrett Hasseldine said.

Regional WA households were faring worse, he said, with about 1.04 per cent behind, compared to 0.83 per cent in metro Perth.

“I expect that home loan delinquencies will continue to worsen before they show signs of improvement,” Mr Hasseldine told Business News.

The trend may come as a surprise to some.

WA property prices have held up better than in other states and the latest report from CoreLogic shows Perth is still considered affordable.

Perth home prices were up 2.7 per cent in the 12 months to January, although after adjusting for inflation that’s effectively a 5.6 per cent fall.

Inflation has been higher in Perth than in almost all other Australian capitals, running at 8.3 per cent in 2022.

Mr Hasseldine said mid to lower socio-economic regions were among those hit hardest, as were households that took out new loans or refinanced at maximum capacity during COVID.

Among the Perth suburbs with the highest portions of loans in arrears were Malaga, Merriwa, Bickley, and Middle Swan.

Outside of Perth, 4.7 per cent of home loans in Coolgardie were behind, 3.9 per cent in South Boulder and 3 per cent in Onslow, although the sample sizes are smaller.

Each 25 basis point rise in the official cash rate could lead to about 300 more WA households falling behind on their mortgage, Mr Hasseldine forecast.

It could be a perfect storm for younger Australians who purchased their first home during COVID, he said.

And the news isn’t any better for the months ahead, with markets pricing in at least two more interest rate rises by mid-year.

Then there’s the huge number of fixed-rate mortgages that will expire and switch to variable: more than a third of all Australian mortgage debt was fixed as at October 2022, according to the Reserve Bank of Australia.

The RBA’s financial system review in that month warned rising rates and the expiry of fixed mortgages could combine to increase arrears, although noting borrowers had built up a savings cushion.

Moody's associate managing director Ilya Serov said arrears in WA had been reasonably stable and had been higher in the past.

Rising rates and the transition from borrowers on fixed mortgages would lead to a moderate increase in arrears compared to last year, he said.

“It’s not obvious that arrears will lead to defaults or losses in large numbers,” Mr Serov told Business News.

The low level of unemployment would support homeowners, and Perth house prices had not endured the dramatic correction on the east coast, he said.

How the squeeze plays out will have a big impact on discretionary spending, the inflation fight, and in a worse-case scenario could severely hit property markets.

While the data has flashed a warning light, recent homebuyers who spoke to Business News were optimistic they would make it work, although discretionary spending will take a hit.

Optimistic

Amelia and Harrison Thomas started building their house in Wellard in 2020, using their savings and benefiting from a combination of grants and a federal loan guarantee.

The house was finished in mid-2021.

The interest rate on the couple’s mortgage has almost doubled since they took it out.

While Ms Thomas had sought to move to a fixed loan in the first half of 2022, in the months before she had her first child, she met resistance from banks.

“I started looking around and asking about a fixed loan,” Ms Thomas said.

“I kept getting pushed back. I got talked out of it three or four times.”

But she said the family had kept their mortgage debt much lower than the approved borrowing capacity.

Ms Thomas is on maternity leave from a job at an international consulting firm, something she said would not have been possible if they had borrowed more.

Dean Wicken built his new house near Cockburn and said construction had been a reasonably smooth process.

Mr Wicken said the federal government’s Homebuilder grant program had sparked his interest in building, and he borrowed using the state government’s Keystart.

“I’m really glad about the timing,” he said.

“I managed to pick the point, by luck more than anything else … before every man and his dog was buying.”

Source: ABS

The data supports this view of a surge in loan activity.

Boosted by government and central bank stimulus, new loans for owner-occupiers building their own homes more than tripled over 12 months to be $790 million in WA in February 2021 alone (see chart, page 27).

That inflated a bubble in new homebuilding, with shortages of workers, rising costs, and huge construction delays to follow.

It also means there is a substantial number of WA residents barely two years into their mortgage.

Mr Wicken said half of his loan was fixed, which he attributed to using a good mortgage broker.

“I’ve got to say, I’m not looking forward to the [fixed] half coming off, it’ll double my interest bill,” he said.

“What I’ll likely do is look to refinance because I’ll have more than 20 per cent equity.”

Mr Wicken said he had chosen an entry-level home, rather than seeking to build his dream home.

“If I had unexpected expenses that’s when I’d be in trouble,” he said.

Selina Metternick-Jones, who works in a management role in state government, said she bought her first home in Victoria Park just before the pandemic struck.

“I was looking for three years and finally found my dream home,” Ms Metternick-Jones told Business News.

“It stretched me, but it wasn’t my absolute limit.”

She had locked in a low fixed rate, which will jump from 2.6 per cent to 5.5 per cent in March.

“It’s a lot of extra money, single income,” Ms Metternick-Jones said.

Further increases would add pressure, although she had a few options if necessary, including cutting discretionary spending.

Another would be to refinance with a different lender, but that would require a revaluation that would increase the home’s price to give her more than 20 per cent equity.

Nonetheless, Ms Metternick-Jones said she was grateful to have had her own house during the pandemic, and to not be searching for a place in a tough rental market.

Further north, in Beldon, Kirra Johnson and her fiancé also bought before the pandemic hit.

Ms Johnson is on maternity leave and the couple is undertaking a major extension of the house.

The rising rates will cost at least $300 more per month, she says, so there will be cuts to luxuries and discretionary spending.

Like many mums, Ms Johnson is facing substantial daycare costs when she decides to re-enter the workforce.

She remains optimistic, while acknowledging further rate hikes will put the family under pressure to make tough choices.

Pressure

The impact of inflation and rising rates have led to increased demand for support services, including Foodbank.

One Foodbank client, Maree, told Business News her family started using the service after her husband was injured at work a decade ago.

Maree said Foodbank had been crucial, particularly through the pandemic.

She said she was incredibly apprehensive about her outlook, given her fixed-rate mortgage would switch to variable in May.

“The thought of it going up much more is scary,” Maree said.

“You can’t get rentals.

“It’s terrifying, to be quite honest.”

But she said she would make it work, no matter what, as she had fought too long paying off her house to lose it.

Maree said she anticipated there would be an increase in the number of first-time Foodbank clients.

Demand for financial counselling had also grown, Financial Counsellors Association of Western Australia executive officer Melanie Every said.

Increasingly, she said, people were finding their income would not cover mortgage payments or rent and other essentials, and there were concerns many people were cutting back on medicine and not renewing insurance.

“What is clear is that more and more Western Australians will experience mortgage stress as debt levels and cost-of-living expenses continue to rise,” Ms Every said.

“There is a changing face to hardship and many who have never found themselves in this situation before are starting to struggle.

“First-time buyers who bought at their limit when interest rates were at their lowest, will face or are already facing massive increases when fixed rates come to an end.”

Stress and mental health would be affected, she said.

That’s a stark reminder that interest rates, house prices, and inflation are more than just numbers.

Support services are available: The national debt helpline on 1800 007 007 and at FCAWA.org