Mortgage default not yet a ‘big issue’, says economist

Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver emphasised that although household debt is high, home loan rates would need to see an increase of around 2 per cent before becoming “a serious problem” for mortgagors.

“Any increase would mean a decline in [mortgage holders’] purchasing power, but it’s obviously a bigger problem for those who have taken out a mortgage more recently,” Mr Oliver remarked.

“But in terms of becoming a serious problem… mortgage rates would have to rise by 2 per cent or maybe a bit more before it starts to become a really big issue.”

Mr Oliver’s comments come after mortgage market analysts Digital Finance Analytics said that around 20 per cent of borrowers holding an owner-occupied home loan would “have difficulty” paying off loans if the interest rate were to rise by less than 0.5 per cent.

The principal of the analyst company, Martin North, added that “young affluent” borrowers would likely struggle the most.

Writing on his blog, Mr North said: “[A]round 20 per cent [of owner-occupied borrowers] would have difficulty with even a rise of less than 0.5 per cent, whilst an additional 4 per cent would be troubled by a rise between 0.5 per cent and 1 per cent, and so on.”

Meanwhile, Mr Oliver commented that “we’d have a way to go” before rate hikes start to have a major impact.

“There would be people who have taken mortgages out recently who would be a bit more constrained, but that’s a relatively small proportion of the total,” he elaborated.

The risk of mortgagors potentially facing default would not immediately be a “major problem”, according to Mr Oliver, who emphasised that “sizeable” increases in rates would be required for that to happen.

“The changes that the banks put through are relatively minor, if they’re acting out-of-cycle or on their own. They tend to be 0.1, 0.15, those sorts of moves – not major. To have a problem, you’d really have to have the RBA raise interest rates significantly and that be passed on by the banks.

“But the RBA isn’t stupid, it wouldn’t just keep raising rates until there were mass defaults occurring in the property market, because it would see no reason to crash the property market. It would want to slow things down if they’re starting overheat,” he concluded.

[Related: Post-Christmas debt tipped to hit $397m]