For most people, the Reserve Bank of Australia’s bi-annual Financial Stability Review is a tough read. For anyone interested in the housing market however, the section on household balance sheets (pages 41 to 46) is essential reading.
Of particular interest is the analysis on mortgage arrears across Australia and the comparisons with other countries. The percentage of mortgages more than 90 days in arrears are a reasonable barometer of household mortgage stress; or what seems to be in the case of Australia, a lack thereof.
Across the entire pool of mortgages nationally the report (based on data from the Australian Prudential Regulation Authority) shows that slightly less than 0.6% of housing loans are 90 days or more overdue.
As the graph shows, the level of mortgage arrears has been trending upwards since 2003 and has recently shown an improvement, falling from 0.7% in mid 2011.
International comparisons put this measure into perspective. The percentage of non-performing loans are the highest in the UK at just below 7% (and the upwards trend is continuing), while the percentage in the Euro area is approaching 6% and the US shows an improving trend with non-performing loans now around the 5% mark.
From state to state it can be seen the trends are somewhat different however, it should be noted that these figures are based on securitised mortgages only and they represent around 10% of all mortgages. Based on these figures, the resource rich states of Western Australia and Queensland are showing the highest rates of mortgage arrears. According to the RBA this is likely due to loans which originated between 2006 and 2008 “towards the end of the period of rapid housing price growth in those states which was followed by falls in prices”.
It can be seen from the applications for property possession which are a leading indicator for loan defaults, that each of the states is likely to show an improvement in arrears rates going forward.
It’s clear from the graph below which shows the regions with the highest housing loan arrears rates that most of the repayment pain in concentrated across the mortgage belts and areas with higher rates of unemployment. Even these regions aren’t showing an arrears rate above 1%.
Overall, the findings show that the vast majority of Australians are responsibly paying down their debt. In fact, based on the most recent Household, Income and Labour Dynamics in Australia (HILDA) Survey, the RBA Review highlights that “many borrowers are repaying substantially more than required” based on their mortgage contracts. Additionally, the RBA Review suggests that the rate at which borrowers were making excess repayments on their mortgages increased over 2011.
The RBA also suggests that the reduction in lending rates in 2011 coupled with the fact that most borrowers don’t change their regular repayment amounts when interest rates fall provides an additional buffer to offset any potential future setbacks to their income.
The latest Financial Stability Review provides an endorsement to stability and resilience of the Australian housing market. If arrears rates were surging, as they did in the US, UK and Euro area there would certainly be some alarm bells ringing. In fact, the opposite is true and the leading indicators are suggesting arrears rates are likely to improve over the year.