Every crisis is an opportunity.
The media is making a bit of noise at the moment about rising mortgage stress and rising arrears (people falling behind on their payments.)
This is not unusual in a rate-hike cycle, especially one as aggressive as this one.
But economists still expect at least one or two more hikes before the year is out.
If that happens, then Roy Morgan reckons that almost 30% of Aussie households will be in ‘mortgage stress’, and that’s assuming no lift in unemployment, which seems unlikely.
This number is always pretty high, so I don’t think they’re seriously suggesting that one in three Aussies are at risk of default. But they are being stretched.
Similarly, Lendi, a leading mortgage broker, also believes that two in five borrowers will be pulled underwater on their monthly budgets if lenders pass on the cost of two more rate rises.
Moody’s also recently reported that 30-plus day arrears on 2022 vintage prime residential mortgage-backed securities (RMBS) have soared (red line below), with 2021 vintage mortgages also rising sharply (blue line below):
The way to read that chart is to see that a bit over 1.5% of mortgages written in 2022 are now 30 days or more in arrears. It’s about the same for mortgages written in 2021.
Those numbers are still pretty low, but there has been a steep acceleration, although this is what you would expect with such a steep lift in interest rates.
So look, I’m looking at this and I’m not seeing a systemic risk here. Yes, stress is rising, but that’s what interest rate hikes are supposed to do – introduce stress into the system.
And for now, the numbers seem pretty low and manageable.
But it’s interesting to think about what happens to these borrowers going forward, especially if unemployment rises as expected.
If things get really bad, they’ll be forced to sell. I don’t imagine the first wave of this forced selling will be noticeable. There is such a shortage of stock on the market right now, that the market will easily digest a bit of stressed selling.
But maybe, and I think it’s an outside chance but possible if unemployment rises more than expected, we get a rush of forced sales, and it tips the balance of the market back in favour of buyers.
At that time, there will be sellers desperate to sell, and quickly if they get a whiff that prices might start falling (they won’t).
Motivated sellers are great to work with. They’re ready to deal. They’re ready to come to the table. They might even be willing to do a joint venture, vendor finance deal with you if you can take the monkey of the weekly mortgage repayments off their back.
If you’re ready to be creative, and ready to find those sellers desperate to sell, there could be a great opportunity in the next six months to a year to grab something at a great price, before falling rates in the 2H of 2024 set a fire under prices again.
JG.
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