Mortgage stress is rising and the media’s favourite property price bear, Professor Steve Keen is still predicting property prices to fall by 40% over the next 10 to 15 years. In the face of the 12% price rise experienced in 2009, according to Keen, the First Home Owner Boost has created a caste of “sacrificial lambs” that enabled Australia to largely avoid the GFC.
He refers to a recent study by Fujitsu Consulting that points to rising stress among Australia’s mortgage holders, particularly the first home owner segment, implying that this rise in mortgage stress is the first step in house prices trending down in a big way.
But of course, mortgage stress doesn’t have any direct effect on house prices. It’s the specific cases where the inability to afford the mortgage places severe mortgage stress on the household and forces borrowers to sell their home that matter. That is, only when mortgage stress directly leads to arrears and defaults on properties will prices be affected.
According to the RBA’s Financial Stability Review published last September, the proportion of non-performing housing loans in Australia (those 90 days or more in arrears) is just above 0.6%. According to this chart, this percentage hasn’t reached 1% since the RBA’s series began in 1993.
Even when, according to the same study, mortgage stress was affecting nearly 900,000 households in August 2008 (50% more than current levels), actual non-performing loans remained stubbornly low. I don’t doubt that the survey is an accurate measure of mortgage stress, but it seems that Australians are apparently very good at paying off their mortgage, even in the tough times. When they have had to sell, they’ve been able to move out of arrears due to increases in prices during the time that they held the property. The rarity with which this has actually occurred hasn’t had any broad effect on house prices in the last 20 years.
I’m not convinced that first home buyers overstretched themselves to such an extent that will show up as a spike in foreclosures or arrears. In the first half of 2009, the average loan size for first home buyers did rise significantly above the average loan size of all mortgages, a number that it has historically tracked closely. It has returned close to parity now, but it’s hardly surprising that it rose temporarily. Potential first home buyers were forced out of the market due to low affordability during the previous 5 years, and once affordability improved, the typical buyer was a bit older, maybe had a family, and definitely had relatively higher incomes than the typical first home buyer in years gone by.
Even if a growing proportion of first home buyers did overstretch themselves and were forced to sell, it’s very unlikely that they’ll have to sell at a loss given the national price rise in the last 12 months. Even looking just at the bottom half of the market, prices have still risen by 5%-10% in most capital cities since December 2008.
To expect significant price falls because new first home owners will simply start defaulting on their mortgages and flood the market with properties is just wishful thinking.
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