Digital Finance Analytics (DFA) has just released its mortgage stress and default modelling for Australian mortgage borrowers.

Across the nation, more than 820,000 households are estimated to be in mortgage stress through July (up from June’s 810,000), with 20,000 of these in severe stress. This equates to 25.8% of households, over 25.4% in June.

“We also estimate that nearly 53,000 households risk default in the next 12 months, 2,000 down from last month,” said Martin North, principal of Digital Finance Analytics.

The DFA has been tracking the number of households in stress each month since the turn of the millennium. Aside from a slight drop in February 2016, the number of households under pressure has been rising steadily each month.

The Reserve Bank’s cash rate cuts have provided some relief, particularly right after the global financial crisis. However, current mortgage rates appear to be more disconnected from the cash rate as banks attempt to rebuild their margins.

According to North, the main drivers of stress are rising mortgage rates and living costs. This is set against a backdrop of plummeting real incomes and growing underemployment. “This is a deadly combination and is touching households across the country, not just in the mortgage belts. On the other hand, employment remains strong in NSW in particular, so income rose a little and small reductions in some owner-occupied mortgage rates helped too.”

Households in mild stress have little leeway in their cash flows, whereas those in severe stress are unable to meet repayments from current income streams. In both cases, households manage this deficit by cutting back on expenditure, charging more on credit cards and seeking to refinance, as well as restructuring or selling the home. Those in severe stress are more likely to be seeking hardship assistance and are often forced to sell.

“The latest housing debt to income ratio is at a record 190.4, so households will remain under pressure,” North said. “Stressed households are less likely to spend at the shops, which acts as a drag anchor on future growth. The number of households impacted are economically significant, especially as household debt continues to climb to new record levels.”

“We continue to see the spread of mortgage stress in areas away from the traditional mortgage belts. A rising number of more affluent households are also being impacted.”

The DFA’s analysis uses a proprietary core market model that combines information from over 52,000 household surveys; public data from the Reserve Bank of Australia, Australian Bureau of Statistics, and Australian Prudential Regulation Authority; as well as private date from lenders and aggregators. All data is current to the end of July 2017.