The Australian housing has become volatile over the past months and according to the researchers at UBS, it could potentially crash if the RBA rates raises too much or too quickly.

Now, a crash on the property market may sound only as a warning for property investors and not for home buyers looking for a place to settle their family, however, this is not the case.

If the property market crash, it will do so where everyone could potentially get hit and get hit hard.

History tells us that a combination of falling property prices and high debt could eventually lead to a severe recession.

However, is the property market signalling a warning bell?

Author: Paul Wylie – Fixed Income Investment Strategist

“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” – JP Getty.

One of the key things we follow at Mason Stevens is mortgage delinquencies. It shows the proportion of people that can’t afford to (or won’t) pay their mortgage and is a good leading indicator of mortgage stress. Given the importance of the housing market, it also has wider implications for the Australian economy.

You would think that if people can’t pay their mortgage, then they wouldn’t be able to spend money at the shops. However, that is the not the case. Mortgage arrears are generally seasonal, with a pickup in delinquencies posts the holiday season and this can be seen in clearly in the chart below.

The chart also shows that mortgage arrears are at their highest levels for a number years. Whilst the market is still relatively benign, there has been a consistent rising trend since the beginning on 2016 that needs to be watched closely.

Genworth and QBE (the two major mortgage insurers in Australia) back up Moody’s data and are showing a similar trend in delinquencies.  Delving into their data, they show that the main regions of stress, Queensland and Western Australia, have been getting worse (not better) over the past year (see table below).  New South Wales and ACT continue to show no signs of stress.

Source: Genworth H117 Presentation

Slicing the data based on the year the mortgage was originated (chart below) shows there is stress in those mortgages issued around the GFC.  This is due to the economic downturn experienced then across Australia and heightened stress experienced among self-employed borrowers, particularly in Queensland, which was exacerbated by the floods in 2011.  2012-14 issuance performance has been driven by resource-reliant states of QLD and WA that are continuing to face challenges following the mining sector downturn. Recent-year issuance is not exhibiting the same levels of stress due to tightened credit standards.

Overall the housing market is not signalling alarm bells at the moment.  If there is an imminent crisis, it doesn’t look to be coming from here.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.