Where’s the risk to our banking system with arrears so low

The Reserve Bank has stated on more than one occasion that mortgage repayments are on average some 15 percent ahead of schedule, the equivalent of some two years worth of monthly payments.

If this is true then despite endless talk of stretched household budgets, then we should actually see mortgage arrears declining to levels not seen in years.

The latest “Fitch Ratings Dinkum Index”, which records 30 and 90 day mortgage arrears, showed that arrears have declined to 7 year lows (30 Day) and 5 year lows (90 Day) respectively.

From Banking Day:

“The strong housing market is suppressing home loan arrears. Banking Day

Fitch Ratings, in its latest Dinkum Index analysing the September 2014 quarter, put loans 30 days or more past due at their lowest level since late 2007. 

Fitch said delinquencies dropped by 14 basis point to 1.08 per cent.

Serious arrears also benefited, with loans 90 days or more in arrears sitting at 0.47 per cent, the lowest level since December 2009.

Arrears are expected to remain largely stable in fourth quarter 2014, Fitch said, due to low, stable interest rates, a strong housing market and lending, and relatively low (albeit rising) levels of unemployment.

Great to hear.

While other developed countries have seen serious 90+ day arrears on up to 10 to 15 or more in every 200 mortgages in the period following the financial crisis, the equivalent figure for Australia is incredibly now below 1, which is wonderful news.

The reasons are clear enough, being a combination of very low interest rates and the unique structuring of so many loans in Australia which maintain repayments at the same level when interest rates fall, thus allowing borrowers to build up sizeable repayment buffers when variable mortgage rates have been declining over a period of years.

This mirrors what has been reported by Genworth (ASX: GMA) in Q3, that delinquency rates have been cascading lower by book year since FY2008.

Great to hear

That’s great to see, with foreclosures in Australia now considered to be “vanishingly rare“.

Arrears to Rise from Exceptionally Low Levels?

One would think almost certainly, yes.

There is realistically only one direction in which mortgage arrears can head over the medium term from such a pleasingly low base.

Relatively low interest rates are more or less a ‘shoo-in’ for most of the remainder of this decade, but the other major factor which can cause mortgage arrears – unemployment – is rising in eminence across many regions of Australia.

Arrears to Rise from Exceptionally Low Levels

Where are the Risk Areas?

We will take an updated look at the latest unemployment rates by region data on Thursday of this week, but here are a few of the regions where unemployment rates have increased concerningly.

Where are the Risk Areas

Recent reports have also highlighted the elevated risk of credit default in a number of Queensland regions as the unemployment rate rises.

We’d add to this list of potential risk areas parts of South Australia where a weak labour market and consumer confidence have contributed to 5 year declines in median house prices in a number of outer suburbs such as Davoren Park, Elizabeth North,  Elizabeth East, Craigmore, and so on.

Fair Warning – Industry Closure Risk

Industry Closure RiskSome on the chat forums have chosen to highlight that withdrawal of Holden may only directly result in a relatively small number of jobs and they have therefore dismissed the risk as insignificant.

That’s one way to look at it, but a market is made up by the full range of views, and in this case we’ll take the sell side of the equation.

As pointed out here previously, when one considers the total number of jobs which are likely to be lost from the shuttering of the car manufacture industry over the next few years – including from suppliers and support industries – in concert with flow-through impacts of rescinded business investment, consumer spending and so on – the potential impact on economic output of some $29 billion and up to 200,000 jobs nationwide could be prodigious.

It’s easy to dismiss the closure of the Holden plant as overblown, and to state that those who do lose their jobs can be redeployed.

Indeed so, but whether or not they can be redeployed within South Australia is another matter entirely.

If the forecast 24,000 jobs are lost in the state, note that the economy has taken fully seven years to add 24,000 jobs, and has added a net total of zero over the last four.

Cumulative total employment growth

A similar point stands for Geelong (and I own property in Geelong, so this is not merely the viewpoint of vested interest).

Positive Investment Decisions

Buying a home to live in is one thing, of course, but the primary advantage that a property investor has is that they are not compelled to buy property anywhere or at any time, so the shuttering of an entire industry should act as an automatic red flag.

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“It might not be that bad” is not a compelling case for an investment decision.

Anyway, that’s our view – that you should look for thriving economies, not those about to be sideswiped by a king-hit – so fair warning.

We’ll provide an updated report on trends in elevated unemployment rates by region on Thursday of this week, so stay tuned for that.

In the meantime if there is one phrase to look out for which should always make property investors wince it is that “prices can’t fall further in this region”, which is another alarm bell which has so often foreshadowed financial loss.




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is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog

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