Borrowers and banks in binge-buying hangover  

The SMH reports that high debt levels and rising energy costs are squeezing the life out of the bottom end of the property market - Borrowers and banks in binge-buying hangover.

The 2008-09 party is now over. Many of those who borrowed during that window are now experiencing the hangover from the binge-buying.

Interest rates have come back to bite those who structured their finances around mortgage rates of 5.5 per cent when the value of property was rising.

Banks and borrowers are now watching the market, hoping that, at best, it will deflate and praying that it won't burst. The concentration of delinquent loans in the lower socio-economic suburbs reflects both the easing of credit in 2008-09 but more particularly the increased cost of living that this group is now experiencing. While unemployment levels have not played into the equation, the increase in interest rates, fuel and utility bills is hitting lower-income families particularly hard.

With the Reserve Bank making clear it has a bias to increasing rates and the NSW's Independent Pricing and Regulatory Tribunal saying electricity prices are set to rise by more than 18 per cent, it is hard to see any relief in sight.

Banks tell us that it is typical for delinquent borrowers to emerge between two and four years after a loan has been made.

Under this scenario, the level of arrears from those that borrowed in 2008 and 2009 should be peaking around now. But the aberrant set of circumstances that led to the spike in borrowing during this time may result in a change in this pattern.

Loans made to this vintage of borrowers may continue to deteriorate - which would be a problem for the banks because 2008 and 2009 combined make up 40 per cent of the mortgage loan books of the major Australian lenders.

At this stage, the rate of arrears is by no means a disaster but that could change if the property bubble bursts.