Mortgage arrears ease a touch

Advertisement

From S&P:

aeq

The number of Australian housing loans in arrears on prime residential mortgage-backed securities (RMBS), as measured by Standard & Poor’s Performance Index (SPIN), fell to 1.14% in August from 1.16% in July. The decline continued from June and July, after rising for seven consecutive months to May, according to the recent edition of S&P Global Ratings’ “RMBS Arrears Statistics: Australia” report.

The decline in August was consistent with our expectations. Arrears start to fall during the third quarter before starting to climb again in December. Arrears in August were up year on year by 23%, including capital market issuance, and 16%, excluding capital market issuance, but remain below their peak and the average for the past 10 years.

The data showing that 1.14% of loans in prime RMBS transactions are in arrears as of August include noncapital market issuance, totaling around A$135.4 billion. The SPIN for RMBS transactions excluding noncapital market issuance, totaling around A$66.7 billion, also fell in August, declining to 1.11% from 1.12% a month earlier.

argh

More than 50% of the loans that underlie the Australian RMBS transactions included in the SPIN are for properties in New South Wales and Victoria. The two states have low rates of unemployment and strong growth in population and property prices.

The SPIN might continue to rise modestly, ignoring seasonal variations, but we do not expect it to increase significantly from current levels. This is because interest rates are low and employment, particularly in New South Wales and Victoria, remains relatively stable.

Outside of Sydney and Melbourne, however, it’s a different story; employment and economic conditions are tougher, and higher household indebtedness is clearly having an effect. Arrears have been about 60% higher in regional areas than in metropolitan areas since the beginning of 2016. We expect the rates to continue to diverge, particularly in Queensland and Western Australia, where regional unemployment is high. This trend will affect the performance of the SPIN because 30% of the loan balances that underlie the index are for properties in regional areas of Australia. However, we expect the better arrears performance of metropolitan loans, which make up the majority of RMBS portfolios, to offset the effect.

Arrears fell month on month for all originator categories except nonbanks, which recorded an increase to 1.06% in August from 1.04% in July. Nonbank financial institutions continued to have the lowest arrears among originators, at 0.61%, followed by other banks, at 1.03%, and nonbank originators, at 1.06%.

fbdb

I look at that top chart and see the new uptrend as analogous to either 2006 or 2007…

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.