Mortgage arrears rate at highest rate since GFC, says Reserve Bank

A lift in the number of Australians behind on their mortgages is a sign of a slowdown in the economy and the problems caused by slow wages growth, the Reserve Bank of Australia has admitted.

The head of the bank’s financial stability department, Jonathan Kearns, used an address to a property summit in Canberra on Tuesday to release data showing the number of people in arrears on their home loans had now reached the level recorded during the global financial crisis.

Mr Kearns said although the proportion of people behind was still low at just on 1 per cent of all loans, the growth in mortgages in arrears was evidence of broader issues facing the economy.

He said while arrears rates were not at a level that posed a “risk to financial stability” or would cause “great harm” to households, they were worth watching closely as they were likely to increase.

“Several factors have been interacting to drive the rise in housing arrears. Economic conditions are undoubtedly part of the story,” he said.

“Weak income growth, housing price falls and rising unemployment in some areas have all contributed.  But they have not acted alone, interacting with earlier weaker lending standards, and the more recent tightening in lending standards.

“To the extent that we can point to drivers of the rise in arrears, while the economic outlook remains reasonable and household income growth is expected to pick up, the influence of at least some other drivers may not reverse course sharply in the near future, and so the arrears rate could continue to edge higher for a bit longer.”

On Monday, ratings agency Moody’s reported that the number of delinquencies on residential mortgage-backed securities rose through the March quarter, with 1.58 per cent behind on their repayments, up from 1.48 per cent in the prior March quarter.

The RBA this month cut interest rates to their lowest level on record, saying the aim was to drive down unemployment in a bid to lift wages growth.

Mr Kearns said areas with high levels of unemployment, such as some parts of Western Australia, had arrears levels double that of the national rate.

He said while unemployment was a factor in people falling behind on their mortgage, it did not account for all delinquencies.

He said total income or a lack of wages growth were major issues.

“Often borrowers may lose some of their income, say because of reduced work hours, a smaller bonus or because tenants move out of their investment property,” he said.

“When they don’t have a large income or savings buffer, even small income falls or an unexpected increase in expenditure can put borrowers into arrears.

“When nominal income is rising strongly, over time, mortgage payments take up a declining share of a borrower’s income. As their mortgage ages and their income rises, borrowers are better placed
to withstand a fall in their income or rise in expenses.

“Over the past five years, nominal income growth has been around half its longer-run average.”

By Shane Wright
This article first appeared in WAtoday.
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