Seven reasons households are well placed to deal with mortgage stress: RBA

Despite an overall increase in mortgage arrears rates over the first half of 2011, Australian households are coping well with current debt levels, says the RBA.

After broadly levelling out in 2010, mortgage arrears rates resumed their upward drift over the first half of 2011, the central bank reported in its Financial Stability Review.

By loan value, the share of non-performing housing loans on banks’ balance sheets increased to 0.8% in June, from 0.7% in December 2010.

The upward movement was also evident in the monthly data on securitised housing loans, with the 90+ day prime arrears rate up about 12 basis points over the same period, to 0.7%.

But the bank says mortgage arrears are “still low by international standards, and the bulk of housing loans in arrears are well collateralised,” the RBA says.

According to the RBA mortgage arrears are unlikely to rise as much as they have in some other countries, where arrears have risen sharply due to high unemployment or “an excessive easing in lending standards in earlier housing price booms”. 

Seven key reasons for Australian households’ arrears resilience can be extrapolated from the RBA review:

1. Housing prices in Australia did not grow especially rapidly in most parts of the country in the period since 2004, although Queensland and Western Australia were exceptions at various stages.
2. The decline in housing prices recently has been modest compared with the sharp downturns seen in some cases overseas.
3. Even before their tightening in 2009, lending standards in Australia had not eased as much as in some other countries.
4. The near-absence of sub-prime housing loans in Australia relative to the US.
5. Australian lenders also assess mortgage serviceability at higher interest rates than those prevailing at origination, a practice not always followed overseas.
6. A large share of mortgage borrowers in Australia make excess repayments. This increases the resilience of households to shocks, relative to countries where it is less common to do so. As well as providing a cushion against changes in borrowers’ financial circumstances, excess repayments increase the distance between the remaining loan balance and a property value that could be lower in the future, making negative equity positions less likely.
7. The labour market in Australia is in better shape than in many other countries, and its prospects are also more favourable given the macroeconomic outlook.