Home owners falling behind despite economic growth

The Australian 12:00am September 20, 2016

Michael Bennet

Record high underemployment across the nation is taking a toll on the $1.5 trillion mortgage market as more borrowers fall behind on repayments in the second quarter, according to credit ratings agency Fitch.

As the spring property season ramps up, Fitch yesterday revealed mortgage arrears rose a “surprising” four basis points to 1.14 per cent in the second quarter despite several economic indicators suggesting the economy is travelling well.

“The increase comes as a surprise given the strong economic environment, appreciating housing market and low interest rates,” Fitch said.

“Fitch believes the worsening arrears may be due to high underemployment, despite falling unemployment.

“A slowdown in the mining sector, which has spilled over into regional areas in Queensland, Western Australia and the Northern Territory may have also affected borrowers. Fitch expects 90-plus days arrears to increase in these states.”

The findings add to contrasting data on the state of the economy amid the transition from mining investment-led growth to other sectors. Last week, the Australian Bureau of Statistics reported that the jobless rate fell to 5.6 per cent last month, a fresh three-year low. But economists claimed the fall was due to lower participation and noted the jump in the underemployment rate — workers who want more hours — to a record high 8.7 per cent. Economists also expressed concern about the second quarter national accounts showing strong annual GDP growth of 3.3 per cent, claiming government spending was driving much of the activity. Household consumption growth fell from the prior three months.

The Reserve Bank has eased the cash rate twice this year to a record low 1.5 per cent to support the economy amid record low wages growth, but Fitch said this had “not significantly benefited mortgage performance”.

However, further clouding the picture, rival ratings agency Standard & Poor’s yesterday claimed the number of “prime” mortgages in arrears declined in July for the second straight month, suggesting pressures may have eased this quarter. S&P said that based on the mortgage-backed securities it rates, arrears were higher than a year ago and the performances of low-documentation loans were worsening.

Separately, Roy Morgan research showed that more than two-thirds of mortgages to owner-occupiers were held by households with two incomes, posing risks if one of the incomes disappears or is reduced. It found that the loss of one of the incomes had a bigger impact than a doubling in interest rates.

Fitch claimed more borrowers fell at least 90 days behind on their mortgages following the “migration” of 30 to 60-day arrears in the first quarter into longer-dated troubles.

“Historically, arrears that materialise in the first quarter are due to seasonal spending and tend to cure themselves the next quarter. However, recent data indicates households that had financial difficulties in the first quarter also had them in second quarter 2016,” Fitch said.

Fears have grown that low borrowing rates are overheating the property market, particularly in Sydney where auction clearance rates on the weekend exceeded 85 per cent.

HSBC yesterday launched a new variable mortgage rate of 3.55 per cent for owner-occupiers. The foreign lender said the deal would help fuel its “bold ambition to significantly increase” its $10 billion mortgage book.