Australians are falling behind on their home loan repayments.
According to ratings agency Standard and Poor’s, the number of delinquent housing loans underlying Australian prime residential mortgage-backed securities (RMBS) increased to 1.29% in January from 1.15% in December.
“While some of the increase is due to a decline in outstanding loan balances, the category for mortgages 31-60 days in arrears showed the largest increase, which suggests more borrowers have fallen behind on their loan repayments for the first time,” said S&P, noting that the trend was broadly consistent among all loan originators.
Loans in arrears by between 31 to 60 days stood at 0.45%, up from 0.3% in December. Those between 61 to 90 days stood at 0.25%, up from 0.22% previously, while those 90 days-plus in arrears stood at 0.59%, up from 0.56% in December.
Despite the increase, substantially higher than the levels reported in the latter parts of last year, S&P said the January figure remained close to long-term averages.
It also acknowledged that arrears typically increase between November and April, affected by spending on Christmas and summer holidays.
Recent out-of-cycle variable mortgage rate increases from Australian lenders may have also played a role in the larger-than-usual increase, it said.
“When first applied, mortgage rate increases can create an initial spike in arrears that could subside in the following months, particularly if the increase is introduced when more borrowers are likely to be on holidays,” S&P said.
“The degree to which the timing of the rate increases.. will become more evident in the coming months.
“The high level of household debt in Australia means borrowers are more sensitive to interest-rate movements. Lenders have announced rate increases out of cycle with cash rate increases, and we expect arrears to rise further.”
This table from S&P shows the change in arrears over the past six months by state and territory.
Arrears rose in every state and territory, with mining states continuing to underperform other parts of the country. The largest increase was recorded in South Australia with levels spiking to 1.81%, up from 1.53% in December.
Despite the lift in arrears recorded in January, S&P said that even at these levels they do not believe that it will affect the ratings on most Australian RMBS, “particularly the senior tranches which continue to benefit from strong levels of credit enhancement”.
“Relatively stable employment conditions are a key support of the current low levels of defaults and losses in RMBS transactions,” it said.
While the ratings agency is not concerned about the uptick in arrears, particularly as it is not unusual at this time of year, the Reserve Bank of Australia is sure to have taken notice.
In its March monetary policy statement, it said that “supervisory measures had contributed to some strengthening of lending standards”, noting that “recent data continued to suggest that there had been a build-up of risks associated with the housing market”.
It elaborated on that further in its March meeting minutes, acknowledging that “borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income”.
Like S&P, it too is closely monitoring labour market conditions closely, and will likely be disappointed by recent data from the ABS that revealed a spike in underemployment and unemployment in February, along with a decline in total employment levels.