Australia's stressed-out suburbs

PORTFOLIO POINT: Sydney’s western suburbs are the worst-affected, but a recent Fitch survey finds a rash of mortgage defaults across Australia.
The latest Fitch Ratings report, on the areas of Australia where home owners are under mortgage stress, gives us a sneak preview on where the residential bargains will emerge. It is also an incredible social commentary that shows how some areas of Australia are sailing through the downturn in reasonable shape while others are in diabolical trouble.

Fitch, a ratings agency, has access to the mortgages that have been securitised, which currently represent about 15% of the total market. Where mortgages are more than 30 days in arrears Fitch is able to collect them into postcodes and the resulting data provides a fascinating and accurate survey of the geographical differences in Australian housing market.

At the moment many people say that because interest rates are low and rentals are high this is a magnificent time to buy a dwelling either as an investment or as a home. (To read more on this see Monique Wakelin’s feature Property’s 'beautiful numbers’.)

While this might be true, the difficulty facing the market is that banks have tightened their lending criteria, bringing down dwelling values in many areas. There is no certainty that current values are going to change in the short term because banks are not going to change their rules for some years.

That is why it is important to either select a residential property that has upside potential or to buy a “commodity” dwelling cheaply. The cheapest houses are likely to emerge in the areas where there is mortgage stress because people are often forced to sell. The latest Fitch survey was conducted in September, just before interest rates plunged, but those interest rate reductions have not so far been converted to higher residential prices because of the tough line taken by the banks. I have attached names to the worst Fitch postcodes in each state.

I have listed 20 bad postcodes in New South Wales (because that’s where most of the problem areas are) and 15 in Victoria, Queensland and WA. In South Australia the mortgage default rate is so low that I have only mentioned five postcodes, and in Tasmania only one is high enough to be worth recording. Here are the outstanding messages from this data.

nTasmania
P’code	Suburb	% defaults
7018	Bellerive	3.63

The western suburbs in New South Wales showed no improvement in the past six months and are clearly Australia’s most depressed area. However, the good news is that mortgage stress in these suburbs is not getting worse and it is likely that the lower interest rates will take some the pressure off.

nNew South Wales
P’code	Suburb	% defaults
2315	Nelson Bay	7.74
2324	Raymond Terrace	6.55
2780	Katoomba	6.26
2190	Greenacre	6.17
2161	Guildford	6.05
2030	Vaucluse	5.98
2165	Fairfield	5.97
2325	Cessnock	5.97
2760	St Mary’s	5.79
2571	Picton	5.75
2766	Rooty Hill	5.63
2575	Mittagong	5.62
2024	Bronte	5.62
2576	Bowral	5.34
2164	Wetherill Park	5.18
2428	Charlotte Bay	5.14
2262	Budgewoi	5
2144	Auburn	4.82
2565	Ingleburn	4.77
2154	Castle Hill	4.72

Dwellings in western Sydney have slumped in value and houses that sold for close to $500,000 are now selling below $300,000, wiping out peoples’ equity. In theory, this represents one of the most attractive areas to buy commodity investment houses but the large number of dwellings currently for sale poses considerable security risks and crime levels are a major problem.

In addition, people living in western Sydney tend to work in medium to lower-skilled jobs. So far they have held these jobs, but if the downturn becomes more serious and they begin to lose their jobs then we will see a bloodbath in the real estate market.

There is no doubt that a key reason the Reserve Bank acted so boldly in reducing interest rates – including this week’s 100 basis point to 4.24% – was the critical situation in western Sydney. I suspect the $10.4 billion economic stimulus package was also motivated by western Sydney considerations.

If you are buying dwellings in the area as an investment you will need considerable local knowledge so that you don’t buy into a security nightmare situation and remember you are also punting that the economy does not dip substantially lower.

The holiday property market is beginning to crack.

Because New South Wales is our most depressed state it is not surprising that a large number of the problem holiday areas are in New South Wales, including Port Stephens (Nelson Bay), Raymond Terrace, Bowral and Katoomba. People borrowed heavily to pay high prices for holiday dwellings and now can’t sustain the mortgages.

And, of course, every major economic downturn hits the Gold Coast so it is not surprising that the top Queensland mortgage stress areas are around the Gold Coast and include Helensvale, Surfers Paradise and Runaway Bay.

nQueensland
P’code	Suburb	% defaults
4212	Helensvale	7.78
4020	Redcliffe	4.63
4879	Palm Cove/Trinty Beach	4.3
4703	Yeppoon	4.11
4217	Surfers Paradise	4.08
4564	Pacific Paradise	3.95
4573	Coolum Beach	3.46
4216	Runaway Bay	3.23
4226	Robina	3.04
4505	Burpengary	3.03
4218	Broadbeach	3.01
4575	Bokarina	2.91
4280	Jimboomba	2.79
4213	Springbrook	2,50
4227	Reedy Creek	2.47

Further north, the real estate market in North Queensland has fallen and amazing purchases are being recorded in some areas. Palm Cove/Trinty Beach and Yeppoon rank third and fourth in the Fitch’s list of stressed mortgage areas in Queensland.

In Victoria, the holiday market does not feature prominently on the list of mortgage stressed areas although Mornington comes in at number 15. This is going to be wonderful time to buy a holiday home, but not all areas will slump so seek out depressed areas that suit you.

nVictoria
P’code	Suburb	% defaults
3193	Black Rock/Beaumaris	4.65
3976	Hampton Park	4.05
3930	Mt Eliza	3.75
3977	Cranbourne	3.48
3064	Cragieburn	3.42
3076	Epping	3.34
3166	Oakleigh	3.28
3044	Pascoe Vale	2.87
3040	Essendon	2.85
3174	Noble Park	2.75
3121	Kealba	2.73
3082	Mill Park	2.62
3023	Caroline Springs	2.47
3219	East Geelong	2.44
3931	Mornington	2.41

In previous real estate downturns, the dwellings hit hardest were those that are expensive. “Commoditised” and lower-priced houses have tended to be protected (although that has not happened this time in western Sydney). So, not surprisingly, some of the most expensive suburbs are showing dangerous signs of mortgage stress.

In Victoria, the Black Rock/ Beaumaris area tops the mortgage stress rankings. In New South Wales, Vaucluse rates sixth on stress levels, well above some of the lower priced areas of the state.

In the 1990 recession, the price of expensive houses fell by 50% and it is possible that the same will happen again because banks are not prepared to fund $10 million houses unless the prospective owner has substantial wealth or a very high income.

Many of those high incomes are in severe jeopardy because executive pay structures are under considerable pressure, business profits are down and margin calls on share portfolios sap at spare cash.

nWestern Australia
P’code	Suburb	% defaults
6167	Casuarina	4.74
6066	Ballajura	4.18
6054	Bassendean	3.88
6168	Rockingham	3.83
6064	Alexander Heights	3.57
6210	Coodanup	3.51
6110	Huntingdale	3.4
6169	Shoalwater	3.37
6330	Albany	3.33
6112	Armadale	3.19
6069	The Vines	3.14
6230	Bunbury	2.78
6056	Bellevue	2.69
6061	Balga	2.69
6057	High Wycombe	2.68

When it comes to expensive houses there will be some wonderful bargains. The next 12–18 months is the time to buy if you have the money. Don’t be afraid to offer a “ridiculous price”; you may be surprised. And down the track it may make sense to sell your cheaper house that has not been substantially reduced in value and switch to a much larger house that has been caught in the expensive house carnage.

There is a good chance that Perth will join Sydney as a high mortgage stress area. Perth barely registered in the Fitch survey six months ago but this time has a large number of mortgage stressed areas. WA real estate skyrocketed in price, driven by the looming mining boom. That mining boom will not take place and the reversal has been so sudden that it will catch a lot of people out. I would expect mortgage stress levels to rise substantially over the next year.

If you are looking to buy a lower-priced residence in Melbourne, be aware that the government is planning a massive increase in the amount of low-cost land in the next decade. That expansion will limit price appreciation in the outer suburban areas. Sydney has been adopting the reverse policy and restricting the amount of land available, which has pushed up values.

If it follows Melbourne (and Sydney geography makes such a decision tough) then there will be a large amount of new real estate on the market. If it doesn’t then Sydney will become Australia’s second-largest city within two decades.

Finally, at the other end of the scale, three areas of Australia emerge as the least-affected by mortgage stress. The first are a large number of the Brisbane suburbs including those in the inner north-west and south-east, and outer south-west and north-west. The low mortgage stressed rankings in these Brisbane regions have occurred despite the carnage on the Gold Coast.

nSouth Australia
P’code	Suburb	% defaults
5114	Andrews Farm	2.45
5108	Salisbury	2.27
5109	Salisbury Park	2.05
5095	Mawson Lakes	1.91
5162	Woodcroft	1.72

The second area where mortgage stress is very low is in inner Melbourne and the outer eastern suburbs. The same applies to Adelaide, which has low mortgage stress. These areas will continue to be affected by the different bank lending criteria but you are much less likely to find forced selling at discount prices unless the downturn becomes much more serious.

It is clear that Melbourne, Brisbane and Adelaide are our best-performing cities.