The outer suburbs of major cities are particularly vulnerable as they house many first home buyers and are at risk of job loss shocks.
Nearly 3,900 property owners are now in distress – and a new report names the suburbs with the worst arrears, warning the worst is yet to come with two cities most at risk.
New figures from SQM Research show distressed listings jumped 5.1 per cent nationally in May to 3,847 properties, with Queensland, Western Australia and South Australia each recording monthly rises of around 9 per cent.
This as the latest S&P Global Ratings quarterly home loan arrears report, released Tuesday, predicted a rise ahead for every Australian state and territory as three interest rate hikes begin to bite.
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Distressed property listings by state: Monthly change. Source: SQM Research
Shockingly it singled out the cities most at risk as Sydney and Melbourne, something which SQM Research managing director Louis Christopher also flagged.
“With inflation sticky and rate relief pushed further out, the larger capitals – Sydney and Melbourne in particular – remain the most exposed,” he warned.
“The balance of risk has clearly shifted to the downside, and the next few months will confirm whether May was the inflection point.”
Mr Christopher said national listings saw their strongest monthly rise “in some time”, sitting in positive annual territory “for the first time in over a year” – but for him it was a red flag.
“When supply returns this quickly while prices stall, it is usually an early sign that the market is at a turning point,” he said.
“Year-on-year comparisons lag – the monthly trend is what matters here, and it is rising. We are watching this closely as an early indicator of mortgage stress.”
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The worst postcodes for home loan arrears. Source: S&P Global Ratings.
S&P Global Ratings’ postcode-level data exposed the suburbs bearing the heaviest burden of mortgage arrears in the country – with outer suburban growth corridors in Victoria and New South Wales dominating the list.
Pakenham in Victoria’s southeast recorded the highest arrears rate of any postcode in the country at 2.57 per cent – nearly 1 in every 40 loans. Point Cook (2.45pc), Craigieburn (1.92pc), Brookfield (1.91pc) and Clyde North (1.79pc) rounded out Victoria’s grim contribution to the top ten.
New South Wales contributed five postcodes of its own – Camden (2.42pc), Berkshire Park (2pc), Bateau Bay (1.88pc), Liverpool (1.74pc) and Baulkham Hills (1.69pc).
The report flagged Victoria and New South Wales as facing the biggest arrears risk of any states. Report author Erin Kitson said Victoria was already carrying the highest arrears of any state as of March 2026, warning its higher unemployment rate and underperforming property market were limiting options for stressed borrowers.
SQM founder Louis Christopher
Ms Kitson expected New South Wales – home to the most expensive real estate medians in the country – to see more pronounced arrears increases in the months ahead, driven by an anticipated slowdown in investor lending and its downstream effects on property prices.
“Arrears are a lagging indicator and generally take around four to six months to surface following rate rises,” Ms Kitson said – a timeline that places the peak impact of the most recent hikes squarely in the months ahead.
Asked if Australia was weeks away from a significant national spike, Ms Kitson said arrears were expected to rise in all states – but that Australia’s strong jobs market would act as a brake on how severe that rise became.
“Low unemployment will act as a stabilising influence on arrears, enabling most borrowers to continue to meet their mortgage repayments,” she said.
“Equity buffers built up in more seasoned loans, and competitive refinancing conditions for better quality borrowers, will also help.”
But she warned borrowers with higher debt levels – particularly the self-employed – were more sensitive to rate rises, with fewer options to refinance their way out of trouble.
Underpinning the pressure is a structural shift in who is borrowing. Investor lending climbed to 40 per cent of all new mortgage lending as of March 2026, according to S&P Global Ratings – which it expects to fall sharply after the removal of negative gearing benefits for new investment purchases of established dwellings.
S&P Global Ratings said some investors may look to restructure their property ownership through trusts or company structures to preserve tax benefits – which could see a rise in Self Managed Super Fund loans as an alternative vehicle for property investment.
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