Worsening arrears due to ‘high underemployment’

According to Fitch Ratings’ Dinkum RMBS Index – 2Q16, which tracks arrears and performance of mortgages underlying Australian residential mortgage-backed securities (RMBS), the arrears figure is “a surprise” given the “strong economic environment, appreciating housing market, low-interest-rates and low-but-positive real wage growth”.

The report found that arrears worsened by six basis points year-on-year, showing that more home owners are having difficulty paying for their loans.

According to Fitch Ratings, the worsening arrears “may be due to high underemployment, despite falling unemployment”.

The agency defined underemployment as “part-time workers who want and are available for more hours of work than they currently have” and “full-time workers who worked part-time hours … for economic reasons, such as being stood down or insufficient work being available”.

The report noted that Australia's unemployment rate was 5.8 per cent at 30 June 2016 (subsequently falling to 5.6 per cent in August 2016), among the lowest rate in the previous three years. Meanwhile, the underemployment rate reached 8.8 per cent in June 2016, a near record high.

Further, the problem could be further exacerbated by the fact that the 30-60 day arrears in the first quarter of 2016 have now become longer-dated arrears (i.e. 90+ days).

The agency stated: “Historically, arrears that materialise in the first quarter are due to seasonal spending and tend to cure themselves in the next quarter. However, recent data indicates households that had financial difficulties in 1Q16 also had them in 2Q16.”

Fitch Ratings argued that a slowdown in the mining sector, which has spilled over into regional areas in Queensland, Western Australia and the Northern Territory may have also affected borrowers and would therefore potentially see 90+ days arrears increase in these states in future.

Monetary policy has not significantly benefited mortgage performance

The report went on to state that monetary policy has “not significantly benefited mortgage performance in 2Q16” and stated that lower mortgage rates “only marginally helped 30-60 days arrears”.

However, in a more positive outlook, the agency said that effects may be delayed and households “may feel positive outcomes on arrears in 3Q16”, adding that the impact of the August 2016 rate cut may also improve 2H16 arrears.

“Tighter lending standards over the last year or so may have lowered households' borrowing capacity, but Fitch believes the standards increase mortgage market stability should the economy start slowing,” it added.

Forecasts from Standard & Poor’s Performance Index for prime residential mortgage-backed securities have also found that housing loan arrears are up year-on-year, but the agency has said it expects arrears to "trend downward during the third-quarter and most of the fourth, before climbing again in December as the effects of pre-Christmas spending start to kick in”. 

[Related: Regional home loan arrears outpace cities]