New research by Standard and Poor’s Global shows that homeowners are experiencing some relief as the market recovers. The increasing home-loan arrears appears to be a grim sign of what lies ahead, especially for those who are in debt traps.

The study found that home loan arrears are at their highest level since the financial crisis. In fact, longer-dated arrears — or those which are above 90 days — are 0.79% as of March this year, higher than the long-term average of 0.42%. These loans are almost half originated in Queensland or Western Australia.

Also Read: WA borrowers struggle to pay mortgage loans

Standard and Poor’s analyst Erin Kitson said that the slowing wage growth, high levels in household debt and the weakening economy would likely keep arrears higher in the months ahead.

He stated, “Tougher terms for refinancing will continue to lower prepayments rates and limit borrowers’ ability to manage their mortgage stress.”

The report highlighted recent policy reforms that were designed to improve the housing market. These changes will not be of much assistance to those in debt.

Below is a table listing five policy changes which could have a significant effect on home-loan arrears.

Recent market developments and their effect on home loan arrears

Policy

Impact

APRA proposes to remove the 7% interest rate floor for debt serviceability calculations
  • Most households will not increase their borrowing capacity significantly.
  • Access to mortgage credit may be easier for households with lower incomes and first-time homebuyers.
  • Expense-verification processes will affect credit access.

Proposed property-related taxes
  • With policy certainty, you can achieve the short-term stability of sentiment and vendor confidence on the property market.
  • It’s less likely to affect arrears performance, which is more sensitive to debt serviceability pressures.

Tax offsets available for taxpayers with low and moderate income
  • This might provide temporary relief but it will not have a long-term effect on debt serviceability.

It is more likely that additional rate reductions will occur
  • To the extent it’s passed on, it will provide some relief.
  • The high level of household debt means that any rate reductions will have less impact than they did in the past.

Proposed first home loan deposit plan
  • It is too soon to comment. Borrowers with poor credit histories increase the risk of negative equity when they take out loans that have a high loan-tovale ratio (LTV) in a declining market.

Source: SP Global

Factors that impact arrears

The report also looked at factors that contributed to the rise in home loan arrears. Kitson stated that this year’s rise in home-loan arrears was due to many factors, as compared to March 2012’s peak.

Also Read: Housing downturn spells trouble for jobs market this year

“What was more important than the fact that household debt was higher, there was less unemployment and wage growth was what made matters worse. These factors were having a huge impact on the economy, he said.

Below is a table showing arrears factors in March 2012, March 2019 and March 2019.

Factors that impact arrears performance

March 2012

March 2019,

Unemployment rate

5.2%

5.1%

Underemployment rate

4.6%

8.6%

Annual wage growth

3.6%

2.3%

Household debt

159.5%

189.6%

Standard variable interest rate

7.4%

5.4%

Prime arrears of 30+ days

1.6%

1.5%

Source: SP Global