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In its most recent RBA Bulletin, the Reserve Bank of Australia (RBA) has outlined the main drivers behind housing loan arrears based on insights from bank liaison.
According to the RBA, borrowers falling into arrears are due to unexpected shocks resulting in a loss of income or an unexpected pressure on household budgets.
The central bank has categorised these shocks into two factors: idiosyncratic factors and macro-economic factors.
The former refers to unrelated economic conditions such as loss of work or “personal misfortunes” (illness or relationship breakdown), which tend to happen even during periods of strong growth, meaning that there will always be some borrowers experiencing challenges in making repayments.
Declining real wages, higher interest rates, and rising unemployment comprise the macro-economic factors, which contribute to a cyclical increase in arrears rates.
“These factors – also referred to as common time factors – make it more difficult for all borrowers to service their debt, particularly those who are more highly leveraged or who have borrowed closer to their maximum capacity,” the RBA said.
“Borrowers that experience these shocks do not necessarily enter arrears immediately. Many borrowers have savings buffers that they can draw on until they find additional income or make further adjustments to their expenses.”
The RBA has found that the main drivers of the recent increase in arrears (which sits around 1 per cent), have been due to the challenging macro-economic conditions and a “modest ageing of the loan pool”.
While financial stability risks “remain contained”, highly leveraged borrowers remained the group of households most at risk of housing arrears, however, only represent a relatively small share of total housing lending and “very few loans estimated to be in negative equity”.
The RBA expects household budget pressures to remain elevated for “some time”; however, this is set to ease as inflation continues to moderate.
In addition, Australian banks are expecting home loan arrears to continue rising, based in part on the latest assessments on economic outlook.
“This assessment is broadly consistent with RBA analysis that shows that nearly all borrowers are expected to be able to continue servicing their debts even if budget pressures were to remain elevated for an extended period,” the RBA said.
“Banks are well placed to withstand increased loan losses, supported by their previous provisioning, strong profits and capital positions, and are further protected by the very low share of loans estimated to be in negative equity.”
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