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Joint JPMorgan and Fujitsu Consulting Australian Mortgage Industry Report, Vol 6, September 2007

Rising credit card debt masks Australian mortgage stress

Fujitsu Australia Limited

Sydney, September 19, 2007

A reliance on credit cards is masking the level of mortgage stress in the Australian housing market and at least 600,000 households, or about eight per cent of the market, are likely to experience mortgage stress by the end of the year according to the latest mortgage industry report from JPMorgan and Fujitsu Consulting.

At least 113,000 households will be so severely stressed they may be forced to sell based on Fujitsu Consulting’s Mortgage Stress-o-meter, which has been updated today.

“Severe stress has already spread from the traditional battlers to middle Australia, but in addition a wide range of households are now under mild stress, requiring them to max out credit cards to keep afloat,” said Martin North, managing consulting director, Fujitsu Australia and New Zealand.

“Not all household segments are equally impacted but the pain is now running deep.

“Mortgage Loan Value Ratios (LVRs) have been rising in recent years, but not in all segments to the same extent. Lenders appear to have flexed their policies to allow more headroom for the borrowers needing the most funding help.

“If we assume prime lending will be repriced by 0.15 per cent and the most risky lending by 2.0 per cent by the end of the year, the number of Australian households under severe stress will climb from today’s 70,000 to 113,000 households,” Martin North said. “Those under mild stress are likely to rise from 171,000 today to 488,000 households within a few months. We have reached a tipping point,” he said.

JPMorgan’s banking analyst Brian Johnson said, “Housing affordability has worsened as house price appreciation has outstripped growth in disposable income. As a direct consequence, initial LVRs have increased to allow first time buyers into the market.

“Additionally, average credit card outstandings, fueled by the introduction of zero balance transfer products and ever increasing customer limits, have grown from the equivalent to one month’s disposable income in 1997 to the equivalent to three months’ disposable income in 2007.

“The growth in credit card outstandings is likely to play a significant role in delaying the overall transmission of ‘mortgage stress’ to bank profitability,” he said.

The report also found the current liquidity squeeze sees banks between a rock and a hard place.

“The steepening of the short end of the yield curve has savaged the incremental spreads on domestic home loan portfolios, however by no means is it certain that the Australian major banks will pass on the increased funding costs associated with a steeper yield curve to mortgage customers,” said Mr Johnson.

The last time the standard variable rate moved independent of the Official Cash Rate was in 1996.

Impact on the profitability of Australian Banks is summarised as:

  • Correlation risk will increase regulatory capital requirement
  • Credit growth will slow from lower ‘churn’ on existing housing
  • Credit growth will slow as previously mis-priced segments of the market shrink
  • Major banks should regain marketshare

In a detailed review of the broader banking industry, JPMorgan banking analyst Brian Johnson said, “Borrower gearing levels have risen. In recent years there has been a dramatic upshift in the gearing tolerance of new home borrowers. However the predominance of variable rate loans, which account for 85.2 per cent of the Australian home loan balances see this increased gearing tolerance likely vulnerable to rising interest rates.

“Housing growth is coming to terms with tightening monetary policy and broader market instability this year. In 2007, housing credit growth accelerated over the first half to June reaching a three month annualised growth rate of 14.3 per cent, only to ease modestly to 13.3 per cent growth in July 2007,” he said.

The report also found that the proportion of all loans across the industry through brokers has capped out at 38 per cent.

“We are beginning to see stagnation in the level of outstanding loans initially written through a broker. Broker originated share of new loans has not grown in the last six months, the first time in four years,” Mr Johnson concluded.

Interviews with Jennifer Neilsen, Chief Executive Officer X Inc. Financial Services Pty Ltd and Hamish Carlisle, Managing Director, QuickDirect Online Mortgages are also included in the report.

The Australian Mortgage Industry Report (Vol. 6: September 2007) is a joint effort between JPMorgan and Fujitsu, focusing on recent developments in the Australian mortgage industry, based on Fujitsu Mortgage Market and Yield Improvement Modeling.

About JPMorgan

JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.5 trillion and operations in more than 50 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset and wealth management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its JPMorgan and Chase brands.
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Fujitsu Australia and New Zealand

Fujitsu is a full service provider of information technology and communications solutions. Throughout Australia and New Zealand we partner with our customers to consult, design, build, operate and support business solutions. From strategic consulting to application and infrastructure solutions and services, Fujitsu has earned a reputation as the single supplier of choice for leading corporate and government organisations. Fujitsu Australia Limited is a wholly owned subsidiary of Fujitsu Limited of Japan. For more information, please see:

About Fujitsu Limited

Fujitsu is a leading provider of customer-focused IT and communications solutions for the global marketplace. Pace-setting device technologies, highly reliable computing and communications products, and a worldwide corps of systems and services experts uniquely position Fujitsu to deliver comprehensive solutions that open up infinite possibilities for its customers' success. Headquartered in Tokyo, Fujitsu Limited (TSE:6702) reported consolidated revenues of 5.1 trillion yen (US$43.2 billion) for the fiscal year ended March 31, 2007.
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Andrew Donohoe or Lauren Platt-Hepworth

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Date: 19 September, 2007
City: Sydney
Company: Fujitsu Australia Limited