The Wrap: Mortgage Stress, Oil, BNPL & Childcare

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Higher mortgage stress ahead; higher oil prices; BNPL trends; demand-supply issue in day care centres.

-Mortgage stress levels similar to 2019
-Oil price rising amid tighter supply
-Buy now pay later: A look at January trends
-Childcare centre supply expected to grow in 2021

By Angelique Thakur

Australian housing market: Mortgage stress

The latest Roy Morgan data into the Australian housing market shows mortgage stress levels remained low in the three months to November 2020.

There were 783k mortgage holders “at risk”, the same as 2019 although higher than the record low of 668k between July and September 2020.

The low rate of “at risk” mortgages in 2020 was driven by support measures by the government along with measures taken by banks and financial institutions such as offering mortgage holidays to distressed borrowers.

However, with support measures progressively dwindling over 2021 things may change, warns Roy Morgan.

In such a scenario, Roy Morgan highlights the importance that tracking mortgage stress assumes, serving as an early indicator of the potential financial distress in the near future.

A survey by Roy Morgan showed by May 2020 about 11.2m Australians were impacted to varying degrees with respect to their employment status and the number was still high at 10.2m in November 2020.

These changes include having their working hours reduced, being stood down for some time, not having any work or being made redundant.

Naturally, mortgage stress for these households is 5% higher at 25.7% than for the other mortgage holders with one in six or 16.8% “extremely at risk”.

Oil prices: Don’t err on the side of caution here

The world may be in for higher oil prices with Brent prices expected to go higher rather than lower by 2021-end.

Aided in no small measure by the discipline of the OPEC-Plus cartel and Saudi Arabia’s restrained output that led to depleting inventory numbers, the oil price rebound since November is no accident, says Citi.

Diminishing inventory levels have led to an earlier than expected re-balancing in the market, prompting Citi to raise its expected prices for Brent and WTI crude for the next 6-12 months to US$70/bbl and US$68/bbl.

While to some it may look like a textbook case of the markets getting ahead of themselves, Citi firmly believes the markets are correctly anticipating the tightening conditions going into, and possibly through, 2021.

Higher demand levels in China and the rest of the world seem to be in line with the soaring traffic activity since the third quarter of FY20 and more robust summer travel demand in the coming days.

The biggest risks to this viewpoint come from Iranian supply although the broker doesn’t envision a rapid supply return in the first half of FY21, along with a US supply response (even that isn't expected until 2022). 

Seasonal trends in the buy now pay later sector

Citi’s analysis of the buy now pay later (BNPL) sector’s January transactions indicated seasonal trends with user metrics down month-on-month although staying above the average levels seen in the December half.

The sector’s growth is expected to be solidly driven by e-commerce growth, stimulus measures and merchant adoption in the near-term, particularly in international markets.

Website visitors to Zip Co’s ((Z1P)) Quadpay continued to outpace peers in the US, growing 325% versus last January.

Afterpay ((APT)) also noted website visits lift up 106% although Citi expects in-store to be a larger contributor in the second half as the roll-out of the stores continues.

The title of the highest downloaded app in the US for the month of January goes to Klarna with total downloads growing by 118% to 816k, followed by Quadpay (114%) and Afterpay (101%). Klarna also boasts of having the most active app userbase in the US.

Citi highlights Zip Co continues to grow faster than Afterpay in Australia, in terms of both app downloads and website visits.

Childcare centres: Wait and watch

With the supply of childcare centres expected to grow in 2021, Canaccord Genuity awaits more clarity on the demand front.

2020 saw a net addition of 290 long day care centres versus 320 in 2019. However, together with government support and lower interest rates, the sector may be looking at more investment, suggests the broker.

While expecting similar activity levels in 2021, Canaccord Genuity is rather dubious when it comes to demand for childcare and cautions investors to not read too much into the higher supply levels just yet.

This is primarily on account of subdued economic conditions and a higher unemployment rate that the broker feels may discourage childcare demand growth.

Evolve Education Group ((EVO)) is rated Buy and is Canaccord Genuity’s preferred pick in the sector given its exposure to the turnaround in New Zealand (the broker also suspects the company could become a takeover target).

Mayfield Childcare ((MFD)) is rated as Buy following its solid result but the broker prefers to remain Neutral on G8 Education ((GEM)) for now following its mixed December trading update.

Think Childcare ((TNK)) is moved to a Hold rating post the recent takeover bid.

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