The Dinkum Index measures some other economy

So, following on from the press release, find more details from the Fitch Dinkum Index below. First the headline index:

Modest Increase in Arrears: Delinquencies in the Australian prime RMBS sector increased to 1.57% in Q411 (from 1.52% in Q311) driven by a rise in the 30-59 day bucket (up 4bp). Arrears have also increased in both the low-documentation (low-doc) prime and non-conforming sectors.

New Issuance Masks Deterioration: The inclusion of five recently issued transactions in the Q411 constituents of the Dinkum Prime Index has muted the change in the Dinkum Index. The index would otherwise have jumped to 1.71%, not so far away from the 1.79% record high. However, Fitch Ratings does not expect this trend to continue in Q112 as issuance was limited during June-September 2011.

No Obvious Cause: The macro-economic environment including interest rates, consumer spending, and unemployment either remained unchanged or improved through Q411. Consequently, there is no obvious cause for the adverse change in mortgage performance.

House Prices Potentially Key: The housing market deteriorated in 2011, with median house prices falling nationally by 4.8%. Stagnation in the housing market limits the refinance and sale options for borrowers in financial distress. When the borrower exhausts the available funds the arrears will materialise, as the loan that might otherwise have been refinanced or repaid will fall into delinquency.

No obvious cause? Consumer spending reflected in retail sales declined throughout Q4. Job losses have accelerated but have been masked by the informal kurzarbeit system we’ve got running. There’s also major sectoral churn with distinct weakness in major eastern metropolitan areas offset by smaller pockets of outrageous strength in the North and West. Looking at headline numbers in the Labour Force Survey or National Accounts is misleading Fitch. And yes, then you’ve got falling house prices. But no:

Despite a stable environment in terms of interest rates, economy and unemployment, 30+ days arrears unexpectedly increased to 1.57% in Q411 from 1.52% in Q311. Deterioration in the performance of prime residential mortgages is more significant than indicated by the Dinkum Prime Index due to the impact of changes to the index constituents in Q411. The inclusion among the index constituents of AUD4.7bn of recently issued transactions (see About the Dinkum Index and Methodology below for details) has mitigated the increase in arrears. Excluding these transactions, 30+ days arrears would have jumped 19bp to 1.71%.

So prime mortgage arrears are sliding despite the “stable environment”. Even outright bulls would admit the structural adjustment from manufacturing and consumption to commodities led growth isn’t “stable”. Sorry, but this is poor analysis and rising prime mortgage arrears are no surprise whatsoever.

The same can be said for low doc:

Low-doc loans are experiencing considerable deterioration, as Fitch expected. The agency continues to believe that low-doc borrowers are likely to take longer than historically to cure their delinquency status.

The Dinkum Conforming Low-Doc Index, which tracks arrears for low-doc loans in the prime (or conforming) sector increased to 5.50% in Q411 from 5.78% in Q311. This increase was driven by a rise in 30-59 days delinquencies, indicating that more self-employed borrowers have started to experience some form of financial distress. Loans in arrears for more than 90 days slightly decreased to 2.74% from 2.81%, but remain high and are more than 5x higher than in the prime full-doc market.

Fitch goes to explain further why there is no pressure from interest rates, unemployment, living costs, floods or the death of Elvis.