Westpac: Mortgage arrears rising across Australia

Westpac’s excellent February 2019 Housing Pulse contains interesting information on mortgage arrears, which are rising across the four major markets:

Mortgage arrears provide a timely indicator of urgent or distressed sales – the presence of which can precipitate significant price weakness. For most existing home owners there is a degree of optionality when it comes to transacting in the housing market – a decision to sell can usually be delayed if market conditions look likely to disappoint. However, for owners that are struggling to meet their debt servicing obligations, selling may be a more urgent requirement with vendors more willing to accept lower prices in order to achieve a sale.

The most readily available measure for the Australian market is Standard & Poor’s SPIN data based on the performance of securitised mortgages. These show the proportion of loans by value that are over 30 days in arrears – in most cases meaning they have missed at least one repayment. The monthly measure goes back to 1996 and is available by state.

Charts 18-20 show arrears rates nationally and across the major states compared to estimates of the debt servicing ratio for mortgagor households. The comparison helps identify the extent to which shifts in arrears may be due to budget pressures as distinct from market specific factors such as oversupply.

Note that while it is the best available measure, securitised loans are not always an accurate reflection of arrears across the wider system. Differences have likely been compounded by lower major bank issuance in recent years – a higher share of ‘non-conforming’ loans alone has added 7bps to the total SPIN arrears rate. Recent reports from the major banks suggest systemwide arrears have shown a much milder rise over 2018.

That said, the latest SPIN data is showing a notable lift in arrears since mid-2018 broadly consistent with estimated increases in debt servicing costs following increased to mortgage interest rates (the estimate incorporates changes to rates on investor and interest only loans as well as standard owner occupier loans rates). As at Nov 2018, the arrears rate was 1.6%, up from 1.2% a year ago (about 5bps of the rise reflecting the shifting share of non conforming loans). That is a touch above long run averages but a short of the previous peaks in 2011-12 and 2008.

The picture by state shows rises across every jurisdiction, again suggesting interest rate increases are a key driver. Despite the recent lift, arrears remain considerably lower in NSW (1.2%) and Vic (1.3%) with the rise less pronounced than might have been suggested by the move in debt servicing ratios in these states.

In contrast, arrears rates are more elevated in Qld (1.8%) and very high and rising more quickly in WA (2.8%). The latter may also be reflecting a more significant incidence of balance sheet problems across WA households with a mortgage. Perth’s dwelling price correction has been running for much longer than the adjustments in other capital city markets, with more buyers likely to have experienced cumulative price declines in recent years. Chart 21 shows an estimate of the share of property sales over the last 5yrs by the cumulative price change (based on city level moves in house and unit prices. It suggests that around 1% of sales have seen prices decline by over 15%, all of these being in the Perth market.

Comments

  1. I am concerned that across Australia we have mortgaged our rears.

    What will happen when the creditors come to collect and we have no dosh? We might get absolutely skewered.

  2. RBA believes average interest rate increases have only amounted to 3-4 bps and only very recently. The rise in debt service ratios evident in the charts from around 2014 is due to higher house prices – and in spite of interest rate cuts. Yes WA shows the way forward as house price falls extend but to some extent that is also influenced by high (and still rising) unemployment which is yet to become an issue on East Coast.

    Once again Westpac appears to be begging for a rate cut, when the evidence shows that rate cuts were part of the problem. It is unaffordable house prices that need to be fixed and you don’t do that by cutting rates.

  3. Jumping jack flash

    “the latest SPIN data is showing a notable lift in arrears since mid-2018 broadly consistent with estimated increases in debt servicing costs following increased to mortgage interest rates”

    Be careful, banks. We want a lost decade (or 3), not Ireland 2.0…

    It is largely obvious, and moot, however, and the banks are explaining the choice of the paint on the titanic as it sinks…

    The interest on the non-productive debt will never be 0, even if we implement QE. Don’t forget QE is for stabilising the banks, it does nothing for the poor rubes servicing the insanely huge amounts of debt they were given to hand over to someone else. And the interest on this truly gargantuan pile of debt must be paid from productive activities. It does not magically generate money in and of itself, as everyone is quickly finding out.

    The interest will cause the whole thing to run backwards if production does not increase to cover the interest.

    Alternatively, if actually being productive is too oldschool for the new paradigm we live in, we must resume constantly increasing the non-productive debt so it can give the illusion that the non-productive debt is actually creating money, and then pay the interest from that.
    AKA, the debt ponzi. And like all good ponzis, as soon as the constant supply of money stops, it all unravels quite quickly.

    • The latest SPIN data as used by Westpac shows that the analysts do not understand the data that they are using. Further, the comparison of arrears to debt servicing makes no mention of any confounding variables and poorly accounts for timing effects.

      With respect to SPIN, Westpac have used the SPIN including balance sheet securitisations. This is important as the the difference between it and SPIN excluding balance sheet securitisations is largely….the Westpac balance sheet securitisation (I’m certain the analysts were not aware of this). And the Westpac balance sheet securitisation is a discretionary portfolio – which means they can pretty much put whatever they want in term of relative mortgage quality in there.

      Effectively, the index used in the Westpac analysis is probably self selected for poor mortgage performance and possibly represents a biased view as to arrears.

      I’m not suggesting that I disagree with the views, though I am more reserved as to my conviction. I just believe that a little more thought is needed.

    • For a lost decade to happen just like the zombie banks and the lost decade elsewhere we need to make sure there is ample liquidity to enable to extend-and-pretend – this time for the household sector. It seems like all this mortgage stress started when we increased the interest rates out-of-cycle for certain sectors of the market (APRA blessed) combined with when credit restrictions occurred and the boom stopped. Higher interest rate and less money supply feedback loops occurring here. In the period of high debt creation ironically none of this stress was being exhibited as lending was loose and competition was high and no individual bank had the means to “cartel” and raise rates in this environment lest they lost market share competing on margin instead making money on debt issued (principal). APRA allowed them to cartel on investor lending reducing competition and therefore liquidity. All this tells me is “debt deflation” and the “tightening credit” is probably the primary cause of this stress. Either directly via their loans and indirectly by lower economic activity. It will continue I think while credit is scarce with indebted household liquidity sources having effectively “dried up”.

      It’s like a mini-GFC but for households instead of the finance sector.

  4. Lenny Hayes for PMMEMBER

    WA is interesting – highest arrears rate in the country (and rising fast), yet stock on market is close to an all time low.

    Something doesn’t compute ?.

    • they can’t repay the underwateriness of their loan when they divest the asset, so can’t sell.

      lock ’em in, Ed!

    • Why? People are hanging on for dear life — hoping for a change in fortunes.

      When you can’t pay, you ring your bank and your loan goes in to ‘hardship’ mode i.e. the bank will ‘work with you’ to restructure monthly repayments etc. It’s not in the banks’ interest to have this house of cards collapse by pressuring it with more inventory. Added to which, after the RC it would be a PR disaster for these scallywags to be seen evicting hordes of people

      • The only time a bank is willing to “work with you” is when the loan + recovery costs exceed the market value; ie banks cannot recover their capital.
        In most other circumstances the banks “asset recovery team” will sell the property from under you if they believe thats the only way they will get repaid.

    • Forrest GumpMEMBER

      Note sure you have the correct data: (From REIWA)

      There were 17,220 properties for sale in Perth during the week, which is two per cent higher than levels seen four weeks ago and seven per cent higher a year ago.