Distressed listings on the upswing

The number of distressed listings nationwide has spiked by more than 15% since interest rates started climbing in May, according to data from SQM research.

Tuesday’s interest rate increase of 0.25 percentage points brings the current rate to 2.85%, putting further pressure on mortgage holders that may force some to unload their property, The Australian Financial Review reported. 

The average borrower with a $500,000 mortgage would see their monthly repayments tick up by $74. Those with a $1 million loan would see payments rise $149 per month. The total increase to mortgage repayments on a $500,000 loan is now $760, according to RateCity. A homeowner with a $750,000 loan has seen monthly repayments increase by $1,140 since rates began to rise, and repayments on a $1 million loan have risen by $1,520.

“I think the seven straight rises are now starting to bite,” SQM Research managing director Louis Christopher told AFR. “The market can handle a 25-basis-point rise and even a 50-basis-point rise, but it’s been happening each month for the past seven months, so sooner or later it’s going to catch up with some property owners. As we get more rate rises, the number of distressed properties will rise as more households struggle to keep up with their mortgage repayments.” 

Queensland saw the largest increase in the number of distressed sales, up 26.7%, or 588 homes, to 2,791, according to SQM Research. Distressed listings spiked 38.7% to 1,265 in New South Wales, while Victoria’s share of distressed listings jumped 1.49% to 765.

Distressed listings rose by 14 properties in Tasmania, by three in the ACT and one in SA, AFR reported. WA and NT both recorded drops in distressed listings, WA by 130 and NT by two.

In just th4e past four weeks, the number of distressed listings increased significantly in Brisbane, up 15% to 1,000 properties – the largest spike among all capital cities.

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Distressed listings were up by 3.1% to 564 in Sydney, by 1.5% to 418 in Melbourne, and 11.2% to 119 in Adelaide. All other cities except Hobart also posted a rise in distressed properties, AFR reported.

Distressed property sales often mean a financial loss for the seller, who can be forced by necessity to accept a lowball offer in order to offload the property quickly. Such listings are sometimes advertised as “mortgagee in possession”, “bank forced sale”, “property forced sale”, or “must sell”, AFR reported.

But vendors in a hurry to sell may find it difficult to find buyers willing to pay their asking price, with the levels of old listings on the rise.

The number of Sydney properties that have been sitting on the market unsold for more than six months rose by 3.3% to 4,650 last month. Stale listings were up 5.9% in Brisbane, 1.5% in Melbourne and 1.8% in Perth. All other capitals except Adelaide also saw a substantial rise over the last six months, according to AFR.

AMP Capital chief economist Shane Oliver said the number of distressed or forced sales could spike significantly by early 2023.

“There is an increasing risk that we’re going to see more forced selling through next year as people’s buffers would have been used up by then,” he told AFR. “RIght now it’s early days and most people still have jobs, so owners who may be suffering mortgage stress will probably be handling that at the moment by cutting back on spending in other areas where they can. But as we go into next year, the interest rate serviceability of 2.5% that was applied up until October of this year would have been used up, so people who are assessed to have free cash flow and be able to keep making the payments, I think would be increasingly on the edge.”

However, CoreLogic research director said the chances of large-scale forced selling were low.

“While there is likely to be upwards pressure on mortgage arrears, we aren’t expecting any material rise in forced sales unless there is blowout in the unemployment rate,” Lawless told AFR. “Although the labour markets are expected to loosen, it’s likely that the unemployment rate will remain well below the decade average of 5.5%. Along with further growth in wages, such tight labour market conditions should stave off any material rise in mortgage defaults.”