Arrears rates pose little risk to financial stability: RBA

Mortgage arrears rates have been gradually rising over recent years to the highest it has been for around a decade, with Western Australia seeing a rise in arrears rates, according to the Reserve Bank of Australia (RBA).

In an address to the FINSIA Signature Event: The Regulators, RBA deputy governor Guy Debelle said the mortgage arrears rate currently stood at 1 per cent, which is low by both historical and international standards.

Mr Debelle said non-performing loans currently pose little risk to the health of financial institutions, adding this is unsurprising given the low unemployment rate and declining interest rates.

“Nonetheless, the arrears rates have been increasing steadily over the recent years to the highest it has been for around a decade, and so warrants some scrutiny,” he said.

While the national arrears rate is low, the largest increase in housing loan arrears has occurred in Western Australia and the Northern Territory. This is due to weak economic conditions and rising unemployment rates.

“Developments in those two regions show how arrears can evolve in adverse economic circumstances,” Mr Debelle said.

In Western Australia, for example, the unemployment rate has risen from 4 to 6 per cent, housing prices have fallen by 20 per cent, incomes have declined, and population growth dipped from over 3 per cent to under 1 per cent, as strong inward migration turned to outward migration.

“These conditions have seen the mortgage arrears rate rise from 0.7 per cent to 1.8 per cent. This is a significant rise and associated with financial stress for a number of households,” Mr Debelle said.

“But it is still not that high given the economic circumstances.”

Pointing to internal data collected by the RBA on how different types of home loans have performed in Western Australia over the past few years, Mr Debelle said loans that were originated with higher repayments relative to income, and loans with higher starting loan-to-value ratios had bigger increases in arrears in the state.

Furthermore, arrears rates for investors have also risen by more, according to the bank’s securitisation dataset.

“Investors in housing in Western Australia have faced falling rental income and the highest rental vacancy rates in nearly 30 years, though this has declined more recently,” Mr Debelle said.

Around half of loans that were originated on interest-only terms and are in arrears also have negative equity in Western Australia.

“The experience in Western Australia provides an insight as to how housing lending in the rest of the country may perform if there was an economic downturn,” Mr Debelle said.

He emphasised, however, that an economic downturn is “definitely” not in the RBA’s forecast.

The RBA also found that when it controlled for the age of loans and the state of the economy, more recent groups have lower arrears rates than earlier cohorts.

In particular, loans originated in the past two years have an arrears rate that is almost 40 basis points lower than loans originated before 2014.

“The lower arrears rates for more recent loans suggests these tighter lending standards have been effective,” Mr Debelle said.

“Improvements to lending standards have placed downward pressure on arrears. In addition, the recent reductions in the interest rates will reduce the interest payments of indebted households and support employment growth and housing market conditions more generally.”  

[Related: RBA lauds ‘effective’ tightening of lending standards]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.