Is Aussie property on the verge of a distressed selling wave?
Residential mortgage debt is now $2.2 trillion, almost as high as GDP at $2.4 trillion. Is this putting us dangerously close to a wave of property forced selling?
08 March, 2024: The Australian approach to mortgage approval, championed by APRA (the folks responsible for the robustness of our financial system), mandates that banks assess you with a seemingly prudent 3% buffer on interest rates. Essentially saying, you should be comfortable servicing your debt even if interest rates increased by 3%.
So when rates ascended by a daunting 4.25%, toppling the buffer by +1.25%, one might assume we’re on a fast track to a horde of homeowners forced into selling.
However, that scenario has not yet emerged, even as homeowners were slapped rolling off their cruisy fixed rate mortgages. Are Australians madly treading water to avoid drowning, or are they comfortably standing on the sand bank?
The Census 2021 data provides a great platform for granular research like this. It lets us break down the number of households by whether they own their homes, how much money they make, and who lives there. Combining this data with the Household Expenditure Measure (HEM), tax rates and typical interest rate margins we can calculate the maximum loan size the 6 million Australian homeowners are capable of servicing at today’s interest rates.
Source: Census 2021, HEM, ATO
When you sum up these maximum serviceable loan sizes for every Aussie homeowner at today’s interest rates, you get $4.5 trillion.
The analysis reveals the Aussie homeowner collective is not just surviving but at today’s rates they could theoretically double down on their $2.2 trillion mortgage debt, as reported by Corelogic. When framed like this, the analysis also helps us understand how rising interest rates didn’t subdue property prices during 2023 when demand shot up and new supply dwindled.
Of course, the use of averages can be deceiving as it masks that while some homeowners are sitting pretty, others are stuck in a rip, wondering if it’s time to signal the lifeguard.
Ultimately, there will always be pockets of distressed selling, but given the resilience of the property market over 2023, it is safe to say Aussie homeowners are sitting with a serviceability buffer more substantial than initially feared.
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