New home sales down as mortgage stress rises for first time owners

First home sales began to drag in December, but new reports show three consecutive rate rises have put nearly half of new first home owners into mortgage stress.

The latest figures from the Housing Industry Association show new home sales fell by 4.6% in December as interest rates continued to rise and the first home owners grant entered its last days.

But a new report from Fujitsu Consulting shows nearly half of first home owners who entered the market in the last 18 months are now experiencing some type of mortgage stress.

The report shows about 45% of first home owners are experiencing “mortgage stress” or “severe mortgage stress”.

Fujitsu Consulting managing director Martin North says “mortgage stress” is calculated by determining whether home owners have reduced discretionary income or other expenses in order to make repayments on time.

“Over the last three months we’ve noticed something happening in the first home owners market. When rates were very low, when incentives were low, it looked like a good time to buy. Now what’s happened is that expenses are increasing, including with utilities or that sort of thing.”

“We see mortgage stress not as a percentage of income devoted to a repayment, but looking at an owner’s overall financial situation. About 45% of the 135,000 who entered the market in the last year are registering some degree of stress.”

North says if interest rates continue to rise along with market expectations, a number of households will enter a more severe situation of mortgage stress.

Head of property research firm Advisor Edge, Louis Christopher, says the problem will have a major impact on the market but its severity will depend on how high interest rates rise.

“It will be a significant problem if we have to return to higher unemployment. We will have a number of new first home owners default this year, and unfortunately this Fujitsu report shows some evidence this is already happening.”

“This is quite a concern because interest rates are at still relatively low levels. On the other hand, it’s not quite a surprise because many first home owners bought at ultra-low or record-low interest rate levels and bought at a stretch.”

Christopher also says the banking sector has questions to answer regarding the number of home owners currently experiencing stress.

“Quite clearly the banks were rationing credit throughout 2009, but they certainly kept the taps on for real estate lending. Did they do their homework when lending money to these people? Going off this report, it appears perhaps there were buyers entering the market who shouldn’t have been.”

Meanwhile, the HIA report shows detached home sales increased by 7% over the 2009 calendar year, with first home buyers driving the recovery. But in December, detached home sales fell by 6.2%, with apartments actually recording an increase of 10.4%.

Auction sales have started once again for the year, with Melbourne recording an 81% clearance rate with 78 properties sold, with a total value of $52.49 million.

And while sales are down from last year in the other capitals, coastal properties are continuing to perform well. A weatherboard beach box on the Victorian Mornington Peninsula has just sold for $455,000, besting the 2008 record sale of $362,000.

Additionally, the Portsea estate of Kiewa sold for $8.75 million on the weekend, with another estate, Inverary, also selling for $8.71 million.

Sydney recorded a clearance rate of 73%, with 24 properties sold at a total value of $14 million. Brisbane recorded a 38% clearance rate with eight properties under the hammer, while Adelaide recorded a 65% clearance rate with 22 properties sold.