Why Australia's Sky is not falling
- Thread starter chilliaa
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It suggests that most households are able to pay down their mortgage debt, which is why I said "better for those households in severe housing stress of course". Who's overstating the "picture of the stressed household P&L"? And who's saying that stretched households aren't cutting their repayments as mortgage rates fall?!? Fujitsu Consulting reckons there's "433,000 of those households likely to be in severe stress" - that's hardly a majority is it? $7.5B is a lot of money, but it could have been a lot more if all mortgage holders had done the same thing and not reduced repayments.One question, and a simple one at that...
If households are just using interest rate cuts to pay down their principal instead of reducing their repayments, what does this suggest about the ability of these households to service their current debt levels?
i.e. Wouldn't you think that "stretched" households would desperately follow the banks down with interest rate cuts and beg to allow their monthly repayments to reduce?
Somehow, the picture of the stressed household P&L seems overstated.
Debt servicability appears to be pretty good at present despite record price to income ratios. Funny that isn't it. Wouldn't have anything to do with all the things I've posted before around dual income families, rental yields, equity proportions, disposable incomes etc. Funny how that old metric of house price to individual income seems not to be able to accurately represent the true servicability picture any more...
Funny how times change and metrics lag or lose relevancy.
Cheers,
Michael
PS One other thing, when looking at servicability of your IPs you need to consider that you actually have "three" income streams servicing those debts: Yours, your tennants, and the governments. i.e. You put in a bit towards the interest, your tennant puts in a bit towards the interest and the government (via NG) puts in its bit. Again, funny how old metrics of take home pay vs property prices don't quite fit that neatly.
So in answer to your question I'm sure some/most "stressed" households are reducing their repayments to cover their living costs where they can, and/or paying more to get back on schedule. I don't know why they would have to beg - but then I haven't met your broker
p). But what were you expecting, a capitulation from me that the majority of households aren't on the verge of foreclosure? I brought up the fact that households could, and in fact were paying down their mortgage debts, and somehow I'm supposed to either shocked or ignorant of it and its implications?
Debt serviceability must be just peachy for some. And so it should be. But how much does a $7.5B/qtr equity injection represent? It's certainly a lot of money that would otherwise have been spent on among other things housing purchases. Especially when compared to the around $8.5B in equity that was withdrawn in Sep Qtr 06 for consumer spending and investment. We're not in a recession Michael, why wouldn't some people be able to pay down their debts now? I think you've misread what I posted, or misunderstood it.
The same Fujitsu Consulting report found "there was a 3% fall in stressed households. But that those in severe stress rose by 13%". So clearly there are other factors affecting household balance sheets than just mortgage rates here. That's probably in part due to the fall in household wealth, especially for those with margin loans who've had margin calls for example. But clearly more households are worried, rightly or wrongly, about their finances. And as many commentators have pointed out that not spending this extra cash is likely to cause the kind of recession savers seem to be fearing.
Hi DadOfSam,
Fair enough. Wasn't pointing the finger at you directly. Its just that a common theme that is run by the bearish posters is the unsustainability of our current debt levels. What I was pointing out is that current servicability responses seems to invalidate that argument.
i.e. If it was so unsustainable, how come households seem so able to readily switch to debt reduction when the sentiment changes?
Just a general observation and I'll make it again if I hear the "unsustainable debt levels" argument again...
Cheers,
Michael
Fair enough. Wasn't pointing the finger at you directly. Its just that a common theme that is run by the bearish posters is the unsustainability of our current debt levels. What I was pointing out is that current servicability responses seems to invalidate that argument.
i.e. If it was so unsustainable, how come households seem so able to readily switch to debt reduction when the sentiment changes?
Just a general observation and I'll make it again if I hear the "unsustainable debt levels" argument again...
Cheers,
Michael
was reading an interesting article the other day regarding how "housing stress" is calculated.
apparently if more than 30% of net income is required to pay for accomodation than a household is considered in household stress. in the article this arcahic formula was being disputed (okay, by the banks), but it was succulently pointed out that with average consumerables (cars, tv, petrol, food, clothing etc) considerably lower in cost in comparison to average net income, the 30% law is no longer relevant.
for that that doubt me - cast your mind back to what items cost 20-30 years ago, in comparison to income and you will be enlightened.
apparently if more than 30% of net income is required to pay for accomodation than a household is considered in household stress. in the article this arcahic formula was being disputed (okay, by the banks), but it was succulently pointed out that with average consumerables (cars, tv, petrol, food, clothing etc) considerably lower in cost in comparison to average net income, the 30% law is no longer relevant.
for that that doubt me - cast your mind back to what items cost 20-30 years ago, in comparison to income and you will be enlightened.
*wishes Witzl would look closer*
Delinquency rates (> 30 days) as at Sept 08 for Australian issued RMBS was at a record high (1.47%) with Lo Doc sharply picking up to 3.90% (also a record)
Expectations are that the rate of increase should have eased with the IR decreases since then, tempered by increasing unemployment which will become the determinant of credit quality and, therefore, availability over '09.
That is the headline grabbing definition.....
....however, according to page 6-7 of the RBAs Housing Affordability in Australia Background Notes many commentators are misusing the definition of mortgage stress....
The whole of the report is only 12 pages (with lots of pictures)... it covers house prices, housing affordability, housing loan arrears and the rental market and is well worth a read.
Do you have a link ?
PDF too large for the 'ol forum to accept.
Will see if I can find it on a public site somewhere and link
No worries. I think it's pretty clear that there's a sizeable proportion of mortgage holders who are able to increase repayments are live within their means, and are doing so now. The other debat I'm sure is alive and well in another thread.
The chart below shows delinquency rates >30 days as being well under 1%. This chart only goes up to end of 2007 so I would be very interested to see your latest data showing the recent jump to 1.47%.
Here is some more recent data from the RBA...
Cheers,
Shadow.
The chart below shows delinquency rates >30 days as being well under 1%. This chart only goes up to end of 2007 so I would be very interested to see your latest data showing the recent jump to 1.47%.
Cheers,
Shadow.
So it is different here, well, certainly appears to be anyway.
Has anyone got supporting evidence showing Australian defaults and vacancy rates as bad as the US?
Dave
That's what I was trying to get at Dave.... i dont believe in the direct references to us being as deep in the doodoo as the USA, because as yet it seems our mortgage defaults and deliquencies are well below the USAs levels.
Couple that with some REAL COST reductions in mortgage repayments in recent months, and i dont think the number would be increasing at the moment. Just as Chillia suggested.
Perhaps Australians are better users of credit, and our banks are more responsible issuers of credit than our counterparts in the USA?
Commonwealth Banks own figures to Sept 2008 can be found here - page 24-26 show the graphs below. I'd guess CBA is fairly representative of the big 4, which have 80%+ of the market.
They don't show anything especially out of the ordinary, certainly nothing close to the figures suggested by TF.
Attachments
Shadow, me old son. My figures are RMBS at September '08 and from our friends at Moodys ( '07 is a different world...remember CBA and other coming out and saying the GCC won't effect them). Can't find it linked to a public site and posting it would be a breach of the terms of use of my account but I'll keep looking.
The reason that, in my experience, they (RMBS) are a better indicator of the real trends is that the reporting isn't provded by the org. that wrote the loans but those who now own the risk and have to report to their investors.
To be honest, it is relatively easy for banks to fudge arrears rates for stuff on their balance sheet, particularly if mortgage insurance isn't involved or they are using a captive, depending on what results they want to produce. The easiest and most common approach is to allow the borrower to capitalise their missed repaymets into the loan - arrears begone!
RMBS are all insured and capitalisation is a generally a no-no so the numbers can't be fudged and they are therefore a more honest indication of where things are going.
The reason that, in my experience, they (RMBS) are a better indicator of the real trends is that the reporting isn't provded by the org. that wrote the loans but those who now own the risk and have to report to their investors.
To be honest, it is relatively easy for banks to fudge arrears rates for stuff on their balance sheet, particularly if mortgage insurance isn't involved or they are using a captive, depending on what results they want to produce. The easiest and most common approach is to allow the borrower to capitalise their missed repaymets into the loan - arrears begone!
RMBS are all insured and capitalisation is a generally a no-no so the numbers can't be fudged and they are therefore a more honest indication of where things are going.
TF, me old dad, I doubt they're more reliable than the RBA. I think you're wrong, and since you can't even provide a link...
If the borrower is far enough below his loan limit to allow interest capitalisation, then he's not in arrears, is he. He is already ahead in his repayments.
You need to think more.
Cheers,
Shadow.
TF, me old dad, I doubt they're more reliable than the RBA. I think you're wrong, and since you can't even provide a link...
If the borrower is far enough below his loan limit to allow interest capitalisation, then he's not in arrears, is he. He is already ahead in his repayments.
You need to think more.
Cheers,
Shadow.
SM
*pats Shadow on head*
...and the RBA obtains the data via APRA from *drum roll* the banks!
*pinches Shadow on the cheek*
To your second point my cherub - and I'm being gentle here - if you had additional repayments or were allowed to skip payments due to having an undrawn limit you would not be in arrears.
But since we are talking about borrowers who are in arrears, deductive reasoning would imply that we are therefore not talking about borrowers who are not.
*moves on to the point*
For borrowers who are in arrears (read above again if confused) a bank would capitalise those arrears by extending the loan term or increasing the borrowings. That is, rolling the outstanding into the debt and starting the clock again.
This extention to the credit contract makes the arrears go away.
There are other mechanisms but they cost money (sell debt) and should only be used when you *really* need to massage the numbers.
EDIT: BTW, your graph refers to 90+ days not the 30 we have been looking at.
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