Jul 15, 2019
Hey guys and welcome to Finance and Fury! Today we’re joined again by Jayden to talk about whether property prices will keep declining due to higher mortgage arrears.
The RBA’s cookie cutter approach to rates will continue to try and help reduce chances of mortgage default and ease burden on household cashflow.
Why is it that an increasing share of housing borrowers are behind in their mortgage repayments?
- Points to a rising risk to the financial system as housing
loans are 40% of banks assets directly
- This is in addition to trillions sitting in derivative style instruments which use these mortgages as their underlying assets
- When the property backing the loan exceeds the value of the loan then arrears aren’t a big deal for banks. They take the deed of your home and take back their loan (plus unpaid interest/costs).
- With falling housing prices however, the potential for banks to experience losses increases.
Where are arrears at
- While it is increasing, the rate of arrears in Australia is still relatively low compared to internationally. In Australia is should be noted that over 99 per cent of housing loans are on time, or ahead of schedule.
- Making loans involves risk - banks are used to managing this risk.
- But when arrears rates are persistently very low, that would suggest that lenders were being too cautious in lending
- Part of the problem with our economy is that loans aren’t going to businesses (real growth drivers like wages) they go into houses. Our loans are fully recourse, unlike the U.S. for example.
Why borrowers fall into arrears; there’s no single one cause, but often a combination.
- A fall in income or a rise in expenses, or both.
- Personal misfortune, such as unemployment, ill health or a
relationship breakdown, which is unrelated to economic conditions
or the quality of their loan
- Clear pattern of more loans going into arrears in locations where the unemployment rate is higher
- Increases in interest rates
- Personal misfortune, such as unemployment, ill health or a
relationship breakdown, which is unrelated to economic conditions
or the quality of their loan
- Weak economic conditions
- Borrowers can struggle to make their payments if their income falls.
- Weak conditions in housing markets make it hard for borrowers to get out of arrears by selling their property.
- Rate of income growth
- Nominal income is rising strongly, over time, mortgage payments take up a declining share of a borrower’s income.
- Nominal income growth has been around half its longer-run average
- Banks’ lending standards also play a role in arrears.
- Poorer quality loans might continue to perform well in good economic conditions, and only fall into arrears with an economic downturn.
- Assessment and size of lending adds risks
- Drives prices up as well - if rates go up, it’s a worse scenario
Summary
- Housing arrears have risen but by no means to a level that poses a risk to financial stability
- Weak income growth, housing price falls and rising unemployment in some areas have all contributed.
- Australians amassed one of the world’s highest levels of household debt in a five-year property boom amid a combination of low interest rates, lax lending standards and supply shortage.
- Prices have since tumbled, with Sydney’s down about 15% from the 2017 peak – People just aren’t selling their property as nobody is buying – so people who are in arreras wont want to sell at a loss – nor would the banks
How to “Arrears-Proof” yourself
- Accumulated buffers of prepayments of their mortgage, and some others have other assets outside of property. Households with financial buffers can withstand some period of unemployment, but if that extends too long and depletes their savings, they risk falling into arrears
- Budget and know your numbers – stress test whether you can
afford a 2% rise in rates, or if you lost your job for 2 months
- Get insurances in case you are injured and can’t work
Links
https://www.macrobusiness.com.au/2019/06/sp-mortgage-arrears-keep-climbing/
https://www.macrobusiness.com.au/2019/06/lunatic-rba-surging-mortgage-arrears-no-risk/