Almost a million Australians will suffer mortgage stress by September and up to 80,000 are likely to lose their home as the global credit squeeze and higher interest rates bite, a new report shows Data on Wednesday showed Australia's core inflation at a near 17-year high of 4.25 per cent, driven up by the cost of fuel, food and housing, sparking fears of further interest rate rises.

Treasurer Wayne Swan said the record inflation underlined "the pain people are feeling around the kitchen table" after eight interest rate rises in the past three years. By September an estimated 930,000 Australian households will be in mortgage stress, with about 400,000 in severe stress, as a result of rising interest rates, said Fujitsu Consulting's Martin North.

"We have never seen this amount of stress and we have never seen this amount of difficulty in the market," said North. "When people get into severe stress they have about a 20 per cent chance of being forced to sell or foreclosure. Once in severe stress there is only about a 50 per cent chance of getting out."

The report by Fujitsu Consulting surveyed 26,000 homes since 2006 and found an estimated 13 percent of homeowners now suffer mortgage stress, when more than 30 per cent of a household income goes on mortgage repayments. Severe stress is when a mortgage holder can't make repayments without refinancing. Australia's 16 years of consecutive economic growth, coupled with a long period of low interest rates, has fuelled a housing and credit boom in recent years.

But since August 2007 the country's central bank has raised rates four times, taking them to a 12-year high of 7.25 percent, to curb inflation. The global credit squeeze has forced banks to lift their mortgage rates yet further, to around nine percent. Trying to ease funding stresses in the mortgage market, the Reserve Bank of Australia has taken on more than A$1 billion worth of household mortgages in recent days. Homeowners are paying an extra A$5,000 ($4,670) a year on the average home loan compared to two years ago, said the report.

Every 25 basis point rise in interest rates will push another 150,000 homeowners into mild stress and 75,000 into severe stress, said the Fujitsu report. Around 30 percent of mortgage holders in Australia are on fixed rates which are due to be refinanced later in 2008, which will see their loans rates jump from around six to nine percent. "Absolute defaults are low at the moment, but our view is we will see them tick up over the next few months," said North.

Unlike the United States, where homeowners who default on their mortgage walk away debt-free, Australians who lose their homes still carry their bank debt with them. The average Australian home now costs around A$450,000. It takes about 30 months for a homeowner to go from experiencing the first signs of stress to foreclosure, said the Fujitsu report. Mortgage stress has hit young families the hardest with 35 per cent experiencing pressure, said the report.

But mortgage stress was also reaching into more affluent homes, with 12 per cent of those feeling the impact of rate rises. "This (mortgage stress) is unprecedented, because rates are much higher than they have been for a long time and people have borrowed a lot more," said North.

"People try to struggle on, put more on credit cards, perhaps borrow additional loans to get themselves through the hole they are in, but they dig a deeper hole...," he said. "Refinancing is not the silver bullet. Once you are on the stress escalator is it very hard to get."

The Economic Times April 23rd 2008