The prediction comes from Dermot Ryan, AMP Capital’s equity income fund co-portfolio manager, who recently warned investors in the local share market that they should be on “high alert” for signs of risks “creeping into their portfolios” as mortgage stresses may start mounting on younger families.
Highlighting that several ASX-listed retailers that target young families (such as Baby Bunting, Asaleo and Monash IVF) saw share prices fall at the end of 2017, Mr Ryan went on to suggest that this could be a “sign of things to come as the purse strings of some mortgagees continues to tighten”.
Pulling on statistics from the Reserve Bank of Australia, which show low disposable income for those with high debt-to-income ratios, Mr Ryan elaborated: “We’re on alert for areas where we think risks we’re seeing reflected in the banking data could come through.
“There’s almost 20 per cent of households who have recently taken out mortgages which have less than $200 in the bank after paying all their outgoings,” the fund manager said.
He noted that those aged between 35 and 44 are the most vulnerable (given their high household debt-to-income ratios) and that almost 10 per cent of households in Australia have debt-to-income ratios of more than 500 per cent.
According to Mr Ryan, the fact that the Reserve Bank is not expected to raise interest rates anytime soon, coupled with tighter lending following APRA’s lending restrictions, would result in the more “over-levered households feeling the pinch, further curtailing discretionary and lifestyle-related spending”.
“The knock-on effect from this will flow through to the share market and we’re certainly already seeing signs of it.”
Mr Ryan said that he would therefore be “watching closely… companies targeting these segments as mortgage stresses for these groups continue to play out.”
“Investors should be thinking carefully about the exposure they’re carrying in their portfolios stemming from some of these risks,” Mr Ryan added.
Looking forward, AMP Capital’s equity income fund co-portfolio manager suggested that retail sales will be further impacted by the borrowers tightening their purse strings, predicting that those mortgagors moving from an interest-only mortgage to a principal and interest mortgage could end up experiencing a 40 per cent increase in monthly repayments, which may “make a dent” in retail sales.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.