‘Perfect storm of issues’ leaving Aussies on verge of mortgage crisis

Expensive property markets, soaring levels of household debt and predatory lending practices have come under fire with experts warning thousands of households are on the verge of mortgage stress.

Australia now has the second highest housing debt in the world, after Switzerland, and almost twice that of the US – leaving the housing market ripe for a crash that “could be as bad as Ireland or the US”, Digital Finance Analytics’ Martin North said on Monday evening on the ABC’s Four Corners.

“I’ve been studying the market here for a good number of years and I have never seen this perfect storm of issues coming together,” he said, referring to a combination of record high house prices and larger mortgages.

Experts fear how indebted households will manage economic shocks. Photo: Rob Homer

A rise of 1 per cent in interest rates could push mortgage stressed borrowers up from 800,000 households to nearly one million, he said.

“[We’re at] a very sensitive point in the cycle here.”

I have never seen this perfect storm of issues coming together.Martin North, Digital Finance Analytics



Another expert who expressed concerns about household debt was Jonathan Tepper – founder of London-based research house Variant Perception, known for his bearish views on the housing market.

“The dream run is about to end. Price to income ratios are very high,” Mr Tepper said.

“Anyone with a pulse could essentially get a mortgage,” he said.

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While the standard for lending used to be three to four-times the amount of the combined gross borrowers’ income, it’s now as much as double.

Credit rating agency Moody’s downgraded the top four Australian banks and some smaller lenders in June, citing the households’ increased indebtedness.

They pointed to increased sensitivity of Australian banks’ credit profiles to adverse shocks due to “elevated risks” in the household sector.

Simply, the more debt households take on – the more difficult the situation when something goes wrong, such as unemployment due to an economic downturn.

Minack Advisors’ Gerard Minack has predicted a one-in-three chance of recession by 2018.

“If we were to have a downturn [high household debt] would … exacerbate the pain associated with it,” Mr Minack said on Four Corners.

“I don’t know when we get a downturn that pops this but sure as hell one is coming.”

And when borrowers can’t pay their mortgages, lenders can be left in a difficult situation, particularly when heavily exposed to the housing market.

More than 60 per cent of Australia’s banking system loan book is for residential property — covering some $1.51 trillion of mortgages.

While measures from the banking regulator, the Australian Prudential Regulation Authority, have been implemented in recent times to limit investment lending after an east coast property boom many households are in more debt than ever before.

LF Economics co-founder Philip Soos warned some of this debt pressure was coming from mortgage brokers and banks pushing heavy targets to sell home loans.

“Australia has an entrenched culture of debt,” Mr Soos said.

Since deregulation and privitisation in the 1980s, he warned lenders have been able to provide larger loans to households.

“Australia has the world’s second highest household debt to GDP ratio, and the world’s fifth highest household debt to income ratio.”

Lending sums too large for borrowers to feasibly repay is usually in breach of responsible lending laws, but Mr Soos believes it occurs regularly.

“Manipulated loan application forms for mortgage borrowers where lenders have illegally inflated assets and income without the knowledge of borrowers is an obvious sign.”