Officials from the Reserve Bank of Australia stated that while many Australians might fall behind on their mortgage payments over the next months, there is no reason to be concerned about rising home loan arrears.
Arrears have been increasing annually over the past few years, but they are still at their highest level since 2010. Jonathan Kearns is the RBA’s head of financial stability Jonathan Kearns said that this should not pose any threat to the economy.
He stated that arrears should not be increased to a level which poses a risk for financial systems or causes great harm to the household sector.
Kearns said that most housing loans are still in good standing with many borrowers still being able to have prepayment buffers on their mortgages.
He stated that approximately two-thirds (or more) of borrowers have prepayment buffers. Some borrowers also have assets outside of their home. These households are able endure some unemployment.
He stated that households could be in arrears if they are unable to work or have not saved enough.
Global home-loan arrears trend
Australia has lower arrears than other advanced economies. Spain, France, and the UK have higher levels of non-performing loans. Below is a graph comparing Australia’s arrears to other countries.
“Another way to view arrears in Australia is by noticing that more than 91% of housing loans are ahead or on schedule. The banks are trained in managing risk when lending money. Kearns suggested that lenders might be too cautious about lending if arrears rates are consistently very low.
What are the causes behind arrears
Kearns stated it was not surprising that arrears rose despite growth in employment, and declines in unemployment.
He said that Australia has a clear pattern where more loans are being paid into arrears in areas of higher unemployment.
“People between the ages 30 and 40 are more likely than others to have a mortgage, particularly if they have good employment prospects. He stated that arrears will rise if the number of people without work increases. “Conversely, older or younger workers will not see a decrease in arrears rates if they get a job but don’t have a mortgage or second income earners who are already making their payments comfortably.
Given this, he said it is not reliable to just depend on unemployment to predict where arrears would go — the growth of income also plays a huge role in the movement of arrears.
“Mortgage payments will take up a smaller percentage of the borrower’s income if their nominal income increases strongly.” He said that borrowers will be better equipped to handle a decrease in income or an increase in expenses as their mortgages mature.
Problem with Australia is the fact that nominal income growth in the past five years has been only half its long-run average.
He stated that “rising income hasn’t been able to offset other factors that might lead households to struggle to pay their mortgage repayments.”