Home loan arrears level now stable

by Miklos Bolza19 Jul 2017
The number of loan arrears has levelled out, breaking a two year trend, according to analysts from S&P Global Ratings.

In its regular monthly report, RMBS Arrears Statistics: Australia, the ratings agency said delinquent housing loans underlying Australian prime residential mortgage-backed securities (RMBS) stayed stable at 1.21% in May, unchanged from April.

However while this level was unchanged in percentage terms, the volume of arrears of more than 30 days fell by approximately $30m (or 2%) from month to month during this time. This presents the end to a trend for the past two years where month-on-month arrears actually increased between April and May.

The average level of arrears for May over the past decade has been around 1.30%.

Movements were mixed across the country. New South Wales, Victoria, South Australia, Tasmania, and the Australian Capital Territory all recorded monthly declines in arrears while Queensland, Western Australia and the Northern Territory all recorded increases.

South Australia experienced the largest drop, falling from 1.64% in April to 1.56% in May. At the other end of the spectrum, the Northern Territory saw the largest increase rising from 1.70% in April to 1.91% in May.

Arrears in Western Australia remain the highest in the country sitting at 2.37%, almost two times the national average.

Movements in arrears often reflect broader economic trends in areas such as employment, property prices and wage growth, Erin Kitson, credit analyst at S&P Global Ratings, told Australian Broker.

When examining this data, Kitson pointed out that more than 80% of loan exposures underlying Australian RMBS transactions are in NSW, Victoria and Queensland.

“Exposure to other states and territories particularly the ACT, NT and Tasmania is quite small so arrears figures for these areas are subject to greater volatility.”

Looking at where the loans came from, S&P analysts found that arrears increased in originator categories such as ‘major banks,’ ‘non-bank originators,’ and ‘non-bank financial institutions’. Exceptions included ‘other banks’ which fell from 1.14% to 1.07% from April to May and ‘regional banks’ which remained unchanged at 2.27%.

While the major banks recorded an increase in percentage terms, arrears actually fell month to month when looking at dollar value.

“Many things can influence arrears performance across originator types including total outstanding loan balances, interest rates charged on underlying loans, collateral quality of the underlying portfolios, geographic exposures of the underlying portfolios etc,” Kitson said.

Since these loan pools comprised of loans originated over a broad period of time, recent changes such as APRA's tigher lending policies would not directly translate to a change in arrears performance, she added.

Non-conforming arrears rose from 5.03% to 5.16% between April and May while falling in dollar terms.

“Despite the pressures of lower wage growth and high household debt, mortgage arrears have remained relatively low, buffered by low interest rates. Stable employment conditions have also helped,” S&P analysts wrote.

“A variety of lenders have announced interest rate rises in recent months, and this could put pressure on arrears in the coming months; however, we do not expect these movements to be material, based on our forecast of relatively stable employment conditions.”

Kitson said that the incremental nature of rate hikes are designed to minimise borrower repayment shock and the likelihood of default.

“Also, most lenders now incorporate interest rate buffers and floors in debt serviceability assessments in line with regulatory guidance so in theory, the majority of borrowers should be able to absorb a certain threshold of interest rate increases provided employment conditions remain relatively stable.”

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