Mortgage arrears have risen to levels not seen since 2010, but are not at a point that poses a risk to the financial system or households, according to a Reserve Bank of Australia (RBA) official.
Jonathan Kearns, head of financial stability at the RBA, said that economic conditions played a part in the rise of housing arrears. "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,” he said in a speech to a property summit in Canberra on Tuesday. “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."
A robust labour market helped Aussies in keeping their home-loan commitments. Forecasts showed, though, that there will be cooling in terms of hiring moving forward. The RBA recently cut interest rates to their lowest level on record, with the goal to lower unemployment and boost wages growth.
“Around two-thirds of borrowers have accumulated buffers of prepayments of their mortgage, and some others have other assets outside of their property,” Kearns said. “Households with financial buffers can withstand some period of unemployment, but if that extends too long and depletes their savings, they risk falling into arrears. With overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.”
Kearns said areas with high unemployment rates, such as some parts of Western Australia, had arrears levels that are twice the national rate.
While unemployment was a factor in delayed mortgage payments, it was not the sole reason for all delinquencies. Total income or a lack of wages growth was a significant challenge, according to Kearns.
"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. 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," Kearns said. "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."
On Monday, Moody's reported that delinquencies on residential mortgage-backed securities rose through the March quarter, with 1.58% behind on their repayments—up from 1.48% from the previous year.
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