Surging mortgage hardship claims and quick home resales are early warnings of financial stress

Behind the smiles and sold stickers, there appears to be a secret story of heartbreak behind a small but rapidly growing segment of home sales.

Figures from CoreLogic show a record 16 per cent of sales early this year were properties that had last changed hands less than three years prior.

Typically, this can be a sign of a hot property market, where investors are flipping houses and apartments to make a quick (and tax-effective) buck.

There's probably a bit of this going on, with property prices back at record highs across much of Australia.

But the proportion of quick resales is notably higher than in previous boom markets, so it looks like there's another factor at play.

As CoreLogic's Eliza Owen says, that factor appears to be mortgage hardship.

Is there evidence for this hunch? Yes, there is, fresh from the financial regulator.

Last week, ASIC released a critical report highlighting the many deficiencies in how banks treat customers suffering financial hardship.

My colleague Dan Ziffer wrote about it in detail.

However, that report also contained fresh data lifting a lid on Australia's emerging mortgage crisis.

ASIC noted a 54 per cent surge in mortgage hardship notices lodged with banks over the final three months of 2023 compared with the same period in 2022.

In the report, ASIC notes: "A hardship notice is where a customer advises their lender of their inability to meet their obligations under a credit contract."

Last year alone, 30 of Australia's biggest lenders recorded more than 444,000 hardship notices connected to nearly 300,000 accounts.

About 40 per cent of these were related to mortgages, with more than 116,000 home loan accounts affected.

ASIC said more than 80 per cent of those, so at least 93,000, related to owner-occupier loans.

Mortgage cliff no myth

Close to 3.5 million Australian households have a mortgage on the home they live in, so that's roughly 2.7 per cent of home loan borrowers who've told their bank they can't pay under their current terms.

That's a far more alarming number than the 0.7 per cent of home loans in 90-day arrears, which is commonly when banks start foreclosure procedures.

Alongside that arrears figure in the Reserve Bank's latest Financial Stability Review, it noted, "a small but increasing share of borrowers have requested and received temporary hardship arrangements from their lenders, which has contributed to arrears rates remaining a little lower than would have otherwise been the case".

If the RBA had a sneak peek of ASIC's report, then "small but increasing" seems an understatement.

Some media and economic commentators have fixated on the relatively low rate of mortgage arrears as evidence that the mortgage cliff was a myth.

For those unfamiliar with the term, the mortgage cliff describes those who took out very cheap fixed-rate loans during the pandemic and are now rolling onto variable rates that are in most cases about three times higher.

Ignoring the fact that hundreds of thousands of borrowers are still rolling off cheap fixed rates this year, the hardship data from the end of 2023 appear to confirm that the cliff exists — it's just that many banks have thrown their struggling customers a rope to keep them from tumbling to the bottom, at least temporarily.

Hardship provisions are designed to help people who've had a temporary setback — job loss, health problems, a relationship breakdown, natural disasters — until they can hopefully sort out their affairs and get back on track.

But ASIC's survey showed the most common reason for seeking hardship assistance on mortgages was "overcommitment".

In an interview with The Business, ASIC's chair denied that meant what it appeared to say on the sticker — that tens of thousands of customers were lent too much money in the first place.

But given that the survey included reduced income, unemployment, medical, separation, bereavement, business failure, parental leave, abuse, natural disaster and others as a fairly exhaustive list of alternative categories, it's hard not to conclude that banks simply lent too much money to a large group of people without factoring in sufficient buffers for interest rates rising.

It's not surprising they did, and it's equally unsurprising regulators are reluctant to admit it because it was a rule change by banking regulator APRA in 2019 that dropped a 7 per cent interest rate floor on mortgage serviceability tests for home loan applicants.

As rates fell in the lead-up to the pandemic, and then plunged with the RBA's extraordinary stimulus, the repayment buffers that prospective borrowers were expected to demonstrate fell with them.

Given that APRA, ASIC and the RBA all sit on the Council of Financial Regulators, which oversees financial stability, it's little wonder they are reluctant to acknowledge that many Australians were simply lent too much between 2020-2021.

To do so would be to admit they made a bad call to lower lending standards in 2019, acting after public requests from both the Morrison government and some of the big banks to ease restrictions on home loans.

'Distressed' sales at lows despite rising hardship

It must be noted that "during the review period, more than half the hardship notices related to home loans that had been open for more than five years".

It makes sense that older loans account for a large share of hardship, as enough time has passed for many otherwise sound borrowers to fall foul of one of life's many potential misfortunes.

But there was a sizeable group who were already in trouble less than three years into their mortgage.

This is the group that appears to be picked up by CoreLogic's data, selling voluntarily before their hand is forced by their lender.

Thanks to generally rising property prices, most can get out without foreclosure or bankruptcy.

That's probably why Domain's index of "distressed listings" remains low.

It scrapes ads on the real estate website for terms like "urgent sale", "desperate seller", "mortgage in possession", "repossession", "distressed property/sale" and "forced property sale".

Let's face it, how many sellers want to tell prospective buyers they are desperate to sell?

But, with the ASIC report showing about 40 per cent of hardship cases falling straight into arrears once their assistance package ended, it wouldn't be surprising to see distressed listings, and the broken dreams attached to them, on the rise later this year.

That distress could be compounded if a rise in listings reverses the growth in property prices that has given many borrowers a pass out of mortgage prison.