Homeowners and renters facing record levels of financial stress

Financial stress has reached record levels across Australia as homeowners and renters struggle to keep up with the ever-increasing cost of housing as interest rate rises start to bite.

New data from Digital Finance Analytics found 43 per cent of Australian homeowners are experiencing financial stress, up from 32.9 per cent in February 2020, prior to the onset of Covid.

Renters have also been stretched to their limit, with 46.7 per cent now under severe financial stress. 

Digital Finance Analytics Principal Martin North said he expected financial stress on households to continue to rise in the short-term given the hawkish outlook from the Reserve Bank of Australia.

“Frankly, given everything I’ve been seeing at the moment, I expect this to get worse ahead,” Mr North said.

“We’ve got more than four million households out of nearly 10 million who are already close to the edge.

“This is an unprecedented level of financial stress, whether you’re a mortgage holder or whether you’re making rental repayments.”

Source: Digital Finance Analytics

DFA uses nearly 5000 phone monthly surveys to gauge the financial position of Australian households and has been doing so since 2000.

Households are considered in stress if they spend more on necessities and loan repayments than they earn from work, welfare and investments according to DFA. 

Mr North said financial stress was highest in the ACT, where 53.4 per cent of households are in difficulty, followed by NSW at 48.9 per cent and Tasmania at 47.3 per cent. NSW has the largest number of households under stress at 459,000.

Mortgage stress is highest in Tasmania with 56.2 per cent of households struggling to keep up, followed by Victoria with 45.6 per cent.

When it comes to rental stress, NSW has the most at 55.86 per cent, followed by the ACT at 55.9 per cent.

Mr North said the Leumeah area in NSW has the highest proportion of households struggling with financial stress.

Leumeah includes suburbs such as Campbelltown and 64 per cent of its 27,717 households are in financial stress.

The outer suburb location of Tapping in Perth, which includes suburbs such as Wanneroo, Wangara and Darch, is another area where households are struggling to keep up financially, with 65 per cent in financial stress.

In Victoria, 96 per cent of households in Berwick are under financial stress, while 73 per cent are struggling in Narre Warren South.

Toowoomba in QLD has 60 per cent of households in financial stress, while Riverside in Tasmania has 100 per cent of households under financial stress.

Mr North said while there are certain locations under extreme financial pressure, it’s not all based on a lack of household income.

“There are different types of households in different types of locations all experiencing difficulty,” he said.

“One of the most significant groups are those on the suburban outskirts who have bought recently, often in those new highly developed estates – they’ve got big mortgages and their incomes are not keeping up.

“But we’re also seeing a number of regional areas struggling now, including Ballarat.

“We’re also seeing people closer into the city who are also more affluent on the one hand, but more stretched on the other.”

Mr North said there was a range of factors contributing to the sharp increase in financial stress during the Covid period.

“The combined impact of government policy, Reserve Bank of Australia policy and other regulators has been to end up with a significant number of households in mortgage stress,” he said.

“As interest rates have risen and pressures on households have increased, we’ve started to see mortgage stress rising.”

Mr North predicted that if the RBA hiked the official cash rate to 2.5 per cent as they’ve suggested, home prices could fall between 15 and 25 per cent as homeowners would be forced to sell.

Buyers would also have a reduction in borrowing capacity.

“The interest rate rises that we’ve been seeing are likely going to have a profound effect,” he said.

“If we assume the RBA adds 2 per cent, or just about that, another 400,000 to 500,000 would probably fall into that stress category.”

“We’d be knocking on close to half of all households with a mortgage being in stress.

“Wherever you look, we definitely have issues.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.