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Wednesday 17 July 2019

90-day arrears creeping higher

Interest-only cliff update

First the good news: 30 plus day mortgage arrears ticked down from 1.53 per cent to 1.52 per cent in May 2019, though they were still 13 basis points higher year-on-year, according to S&P's latest figures. 

Notably, though, 90 plus day arrears were still rising in May, albeit modestly. 


New South Wales saw arrears decline from 1.28 per cent to 1.24 per cent in May, and there were also declines for Victoria, Queensland, Western Australia, South Australia, and the Northern Territory (with only Tassie and the ACT recording increases from a low base, each to just 1.20 per cent). 


Here S&P Global puts together its usual neat pictorial representation.


There's been a lot of excitable reporting and scaremongering in the usual quarters, but an objective reading of the figures suggest that, up until May, arrears (not non-performing loans or defaults) remained in surprisingly good nick in most states. 

In Western Australia there have been more cases of serious arrears, both for residential and commercial exposures. 

Arrears pause for breath in winter

The deterioration dissipated in May according to S&P, but overall the recent trend has been marginally worse for investors, partly reflective of the interest-only mortgage reset.  


The interesting thing about recent arrears has been that it's not a non-conforming loans issue.


Instead mortgage arrears have largely been hiding in plain sight at the major banks, where 90 plus day arrears have continued their climb. 


Arrears are very low at the non-banks, but the regional banks have also seen 90+ day arrears climbing.

Normally mortgage stress is felt most acutely in the period around and following Christmas rather than in winter, so there will be a further test then.

The wrap

The mechanical interest-only reset no longer applies, but some borrowers are struggling with their transition.

Jobs growth has been very strong, but crunching through the numbers it seems difficult to get a trimmed mean reading for inflation next quarter much above 0.3 per cent, so core inflation may drift further below the 2 to 3 per cent target.

Real wages are at least rising - and on the plus side there is ample room to cut rates without stoking too much inflation - but it's hardly a ringing endorsement of an economy operating near its capacity either. 

Of course, mortgage rates have been falling significantly, and significant tax cuts are set to be delivered, in turn relieving mortgage stress at the margin. 

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