Mortgage stress at record high: Roy Morgan

New research from Roy Morgan has revealed that the number of mortgage holders at risk of mortgage stress in the three months to February 2024 reached a record high of 1,629,000 (31.4 per cent).

This is despite the Reserve Bank of Australia (RBA) holding the official cash rate at 4.35 per cent at its February meeting.

The number of those at risk of mortgage stress in February exceeded the previous record set in January this year by 0.4 per cent when 1,609,000 borrowers were at risk of mortgage stress.

It has also increased by 139,000 since November 2023 when the RBA raised interest rates to its current 12-year high.

Since the central bank began its interest rate rise cycle in May 2022, it has increased rates 10 consecutive times between then and March 2023 from 0.10 per cent to 3.60 per cent, and a total of 13 times until March 2024 to 4.35 per cent.

Nonetheless, the proportion of those at risk remained well below the record high reached during the Global Financial Crisis because of the larger size of the current mortgage market, Roy Morgan pointed out.

Indeed, in May 2008, a record high of 35.6 per cent of mortgage holders experienced mortgage stress.

Since the rising rate cycle began, the number of borrowers at risk of mortgage stress has increased by 822,000.

Roy Morgan CEO, Michele Levine, said: “The extended pause in official interest rate increases for four months from July to October 2023 reduced the pressure on mortgage holders and allowed growth in several areas of the economy to ‘catch up’ and reduce mortgage stress from the mid-year highs above 1.56 million.

“However, the interest rate increase in November has added renewed pressure on mortgage holders.”

Roy Morgan’s modelling revealed that if the RBA raises the official cash rate by 25 basis points in May 2024 to 4.60 per cent, the proportion of those at risk of mortgage stress could increase to 1,639,000 (31.6 per cent), up 10,000 from February 2024.

Inflationary pressures remain

It noted that the latest inflation figures for January 2024 by the Australian Bureau of Statistics (ABS) showed annual inflation at 3.4 per cent, down a significant 5 percentage points from a year earlier.

This equals the lowest annual inflation in Australia for over two years since November 2021 (3.2 per cent).

Levine explained, however, that while inflation pressures are easing, the level of inflation continues to remain above the RBA’s target range of between 2 and 3 per cent, while inflation indicators such as petrol prices remain high.

For the first time in history, average retail petrol prices have been above $1.80 a litre for a record 37 consecutive weeks, or nine months, she said.

“For these reasons we have modelled a further interest rate increase of 25 bps in May 2024,” Levine said.

“The latest figures for February show that when considering the data on mortgage stress, it is always important to appreciate that interest rates are only one of the variables that determines whether a mortgage holder is considered at risk of mortgage stress.

“The variable that has the largest impact on whether a borrower falls into the at-risk category is related to household income – directly related to employment. The employment market has been exceptionally strong over the last year, and this has underpinned rising household incomes that have helped to moderate the increases in mortgage stress since mid-2023.”

Employment affects mortgage stress levels

The latest Roy Morgan unemployment estimates for February showed that almost one in five Australian workers (18.8 per cent or 2.94 million workers) are either unemployed or underemployed.

It said that while inflation and its impact on interest rates are being monitored closely, the greatest impact on an individual or household’s ability to pay their mortgage is if they lose their job or main source of income.

“The variable that has the largest impact on whether a borrower falls into the at-risk category is related to household income – directly related to employment,” Levine said.

“The employment market has been exceptionally strong over the last year, and this has underpinned rising household incomes that have helped to moderate the increases in mortgage stress since mid-2023.

“However, rising interest rates since May 2022 have caused a large increase in the number of mortgage holders considered at risk. If there is a reacceleration in inflation over the months ahead, that results in further interest rate increases in 2024, levels of mortgage stress are set to increase further to new record highs later this year.”

More borrowers extremely at risk of mortgage stress

Roy Morgan considers mortgage holders “at risk” if their mortgage repayments are greater than a certain percentage of household income, depending on income and spending.

The number of borrowers considered extremely at risk stands at 987,000, while the proportion of those in this category has risen to 19.7 per cent up from the long-term average over the last 10 years of 14.3 per cent.

Mortgage holders are considered extremely at risk by Roy Morgan if even the interest-only component of their home loan is over a certain proportion of household income.

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