So much for "inner suburbs not prone to mortgage stress"

[feihong]

These are extracted paragraphs from the RPData email I received in my email, and I thought I would post it here for open discussion:

Cracks appear in the upper end of the market


Property markets outside the mortgage belt are now starting to feel the pinch as a combination of interest rate rises and margin calls start to hit home.

The latest index figures from the RP Data – Rismark Property Value Index were released earlier this week (see http://www.rpdata.net.au/indices/for more information). The index shows national property values increased by 13.65 per cent over the year to February 2008 – a healthy rate of return by any measure. It comes as no surprise, however, that growth in the market is slowing.

Capital growth in the Australian market peaked during July last year and has been trending downwards since this time. The rate of descent has been controlled and is likely to settle around the 1.5 to 2.0 per cent mark for the remainder of 2008. Extrapolating this rate of growth out over the year, we are likely to see a national rate of growth around the 6 per cent to 8 per cent mark over the next year.

A region-by-region analysis of the latest Index data reveals some of Australia’s more affluent markets are now starting to feel the pinch. Mortgage holders in Australia’s wealthy suburbs have historically avoided any sustained downturn in home values due to the tight supply and strong demand for properties in these locations. While declines in property values have become relatively commonplace in the mortgage belt of Sydney and increasingly Melbourne and Perth, the inner suburbs and coastal markets have typically enjoyed above average growth.

Affordability pressures in these wealthy areas have not been as great as in the outer fringes. Mortgage holders in these inner city and coastal suburbs generally earn above average wages and have been prudent enough to leave a buffer in their budgets large enough to accommodate any rate rises. However with interest rates now at a 12 year high, not to mention the rising number of margin calls due to falling share prices, it appears that some of these upper working class and seaside markets are now becoming exposed to price falls.

Within Sydney the high profile Eastern Suburbs experienced a fall in house vales of 0.9 per cent over the six months ending February 2008 and house values within the Inner Western Suburbs fell by 1.2 per cent during the same period. Within Melbourne, house values in the Boroondara council area fell by 2.7 per cent over the last six months. Inner areas of Perth, apart from the Central Metropolitan area are also recording declines in the property values.

The median house value within the Eastern Suburbs is just over $1.7 million, after falling by 0.9 per cent over the last six months. These suburbs of Sydney are popular with young professional buyers, many of whom may have stretched their finances in an effort to buy their home. The average mortgage payments in this region are 70% higher than the national average, while the average income is only 50% higher than the average Australian households. Even with a substantial buffer in their budgets to absorb any rate rises, the added stress of margin calls and lower corporate bonuses are likely to be adding to the stress being experienced in these affluent markets.

The number of margin calls are expected to increase as the year progresses, placing further pressure on upper end markets. With more owners placing their home on the market and fewer buyers, we may see cracks spread further through the inner city and coastal markets. Other markets that may be vulnerable are holiday home locations. As discretionary spending is wound back, the holiday home could be one of the first assets to be liquefied.

There were also some graphs that are attached to the email but I don't know how to upload them.

 

[alexlee]

Margin calls and high corporate bonuses affect the top end. The key was whether a downturn would cause margin calls and affect management pay (if it gets bad enough, of COURSE it will).
Alex

 

[sash]

Margin calls and high corporate bonuses affect the top end. The key was whether a downturn would cause margin calls and affect management pay (if it gets bad enough, of COURSE it will).
Alex

There is very strong evidence the stress has now hit the upper end suburbs.

I have heard alot of these people were exposed to the share market via margin loans. Whilst, they may not need to sell...they are increasingly feeling the pressure.

My GF lives in the Eastern suburbs and a lot of property is not selling at auction and is being passed in.

 

[Ausprop]

"Inner areas of Perth, apart from the Central Metropolitan area are also recording declines in the property values."

woud like to see more info on this... doesn't tally with what I have seen but then again I am not actively looking. I can confirm no price declines around where I live.

 

[DavidMc]

'Not' is a strong word.

Try 'less'.

 

[FlatFoot]

I think this is the old economic rule:
Outer suburb : lower price> higher risk > higher growth potential > higher affordability
Inner suburb : higher price> lower risk > lower growth potential > lower affordability

lower risk does not mean invincible, so there certainly is limit where mortgage stress affect all.

 

[alexlee]

I think this is the old economic rule:
Outer suburb : lower price> higher risk > higher growth potential > higher affordability
Inner suburb : higher price> lower risk > lower growth potential > lower affordability

lower risk does not mean invincible, so there certainly is limit where mortgage stress affect all.

I disagree with that economic rule. Inner suburbs aren't necessarily higher risk or lower growth, and vice versa.

I think it's just that outer suburbs and inner suburbs are affected by different things in the economy.
Alex

 

[Kenster]

... a lot of property is not selling at auction and is being passed in.

Properties not sold at auctions and being passed in mean they are sold later on at lower price than originally wanted for.

As in inner Melbourne market, most passed in properties are sold within two weeks.

The very few that are not sold are recycled back into the market as new auctions (to entice fresh/unaware buyers).

 

[THEHEATH]

I think this a load of hogwash. A drop in values does not necessarily correspond to mortgage stress.

 

[BayView]

I think this a load of hogwash. A drop in values does not necessarily correspond to mortgage stress.

Agree with that; it's more likely to be the interest rate rises have scared away the buyers.

On the subject of mortgage stress; financial ignorance isn't exclusive to the lower wage earners.

There are as many higher income earners as low income earners who go broke.

 

[pieman]

Dont be sucked in, there's planty of people who can pay cash for a 2m PPOR and who earn 300k+. Interest rate rises or share market decreases dont really have much of an affect when you have that sort of means, in fact they welcome the increase in TD rates
pieman

 

[alexlee]

Dont be sucked in, there's planty of people who can pay cash for a 2m PPOR and who earn 300k+. Interest rate rises or share market decreases dont really have much of an affect when you have that sort of means, in fact they welcome the increase in TD rates
pieman

Though that will only support the very top end. It won't support the 'wannabe' levels.
Alex

 

[BayView]

Dont be sucked in, there's planty of people who can pay cash for a 2m PPOR and who earn 300k+. Interest rate rises or share market decreases dont really have much of an affect when you have that sort of means, in fact they welcome the increase in TD rates
pieman

Just because they can pay cash for a $2 mill house means zip about financial intelligence.

Look how many people win Tattslotto and are broke within 3 years, as one example.

It is a well known fact that doctors, who are mostly in the top end income earners, are, as a group, the most "upside down" in society with their financials.

There is massive pressure (all perceived) on them to conform to the image and lifestyle that other doctors have already set; and they usually follow it.

The great news for the rest of us is that there is more likely to be a massive price correction at the top end than at the bottom when things go wrong in their lives - cheap really good properties.

Sad but true.

And this is when the media will trot out the "property market crash" as they always like to focus on the "postcode" suburbs.

 

[aussierogue]

I live in Northcote (6 km from Melb cbd) and I have read recently that there is lots of mortgage stress here. One of the highest in Melbourne along with some of the outer suburbs.