The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages increased to 1.19% in June 2016 from 1.13% in March, but was down from 1.21% in May, ending seven consecutive months of increasing in arrears. S&P Global Ratings expects arrears to generally decline in the second quarter (Q2) from their seasonal peak in Q1. Chart 1: Prime SPIN Source: S&P Global Ratings Arrears in June were up more than 12% from a year earlier, but remained below their peak of 1.69% and their decadelong average of 1.25% (chart 1). Given the majority of loans underlying residential mortgage backed securities (RMBS) transactions are variable rate, we expect that a prolonged period of historically low interest rates should underpin relatively low arrears, all else being equal and providing employment conditions are relatively stable. Ignoring seasonal fluctuations, this generally has been the case since 2012. Over the past seven months, however, arrears have been increasing, despite interest rates remaining at low levels.
And state by state
Each state and territory’s arrears level is a reflection of its general economic health and provides an insight into households’ ability to manage their debt in a changing economic environment. The year-on-year movement of key economic indicators and arrears levels for each state and territory in table 3 shows:
• New South Wales (NSW) was the only state to record a year-on-year improvement in arrears, which fell 5.4%. After the ACT, NSW has the second lowest arrears in Australia, at 0.92%. NSW’s strong arrears performance reflects its generally good economic health, evidenced by its relatively low unemployment rate of 5.20%; which is one of the lowest in the country, as well as its strong retail spending and solid population growth. A strong property market in NSW has underpinned growth in housing construction.
• Victorian arrears were up 5.0% in Q2 compared with a year earlier, but at 1.13% they remain below the national average of 1.19% and their historical peak of 1.86%. Like NSW, Victoria has strong population and property price growth and good retail spending. Victoria continues to benefit from strong housing construction growth, with construction being the third-largest employer in the state.
• Queensland recorded arrears of 1.55% in Q2, up 18% from the previous year and beating the national average, but remaining below the peak of 2.17%. Unemployment in Queensland was lower in Q2 than at the same time a year earlier, but remains one of the highest among all states. The exposure to nonmetropolitan areas across RMBS portfolios is more than 50% in Queensland because it is a decentralised state. The higher arrears therefore reflect the greater exposure to regional areas, which are more vulnerable to regional economic downturns, given local economies’ dependence on a few key industries or employers (chart 3).
• Western Australia (WA) recorded the nation’s highest arrears in Q2 of 1.95%, up 31% from the same time last year. This was the largest year-on-year increase in arrears. The unemployment rate appears to be improving in WA, but lower wage growth, which is more pronounced in WA, is likely to have created conditions for increased mortgage stress as the economy transitions away from jobs in the higher-paying mining sector. We expect this trend to continue as borrowers adjust financially to lower paying jobs outside of the mining sector, particularly for those loans that were underwritten at the peak of the mining boom, when property prices were higher.
• South Australia (SA)’s unemployment rate improved in Q2, but at 6.4% it remains the highest in the country. Arrears in SA rose 22.9% in Q2 from a year earlier. New manufacturing projects in the ship-building industry are due to come online in coming years, and we expect these to improve employment conditions in the state. However, we do not expect this to filter through to arrears performance for some time.
• Northern Territory (NT)’s arrears in Q2 increased marginally year on year to 1.53%. The NT has one of the lowest unemployment rates in the country, which probably reflects the ongoing construction work associated with large-scale gas projects. Given the small exposure in RMBS portfolios to the NT, arrears trends are more volatile in percentage terms.
• Australian Capital Territory (ACT) arrears in Q2 rose 25.3% from a year earlier, but at 0.89% remain the lowest of all the states and territories. With the public service a key employer in the nation’s capital, local employment conditions are likely to be more stable than other states and territories, particularly those with a higher exposure to the resource sector. Arrears in the ACT have been below 1% since July 2012.
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.
