The number of home owners behind on their mortgages is likely to keep climbing, the Reserve Bank believes – with arrears already at their highest level since the global financial crisis.
Jonathan Kearns, the RBA’s head of financial stability, said on Tuesday arrears were at their highest since 2010 and might increase further due to continued weak wage growth and lower house prices.
But he said the level was still well below that reached in the early 1990s recession, and remained low by international standards.
On Monday, ratings agency Moody’s reported that the number of delinquencies on residential mortgage-backed securities rose in the March quarter to 1.58 per cent – up from 1.48 per cent in the same quarter for 2018.
Moody’s senior analyst Alena Chen told The Sydney Morning Herald that the agency expected delinquencies and defaults to continue to increase in the short term.
Mr Kearns said the growth in mortgage arrears was evidence of broader issues facing the economy – including borrowers being hit by unemployment and weak wage growth. In some areas, an absence of buyers meant it was harder for a struggling home-owner to sell their property to get out of difficulty.
Tighter lending standards might also have had an effect, Mr Kearns said. In recent months, some interest-only borrowers have been forced onto principal and interest loans (with higher repayments), and others have found it harder to refinance with longer-term or lower-interest loans.
“Recognising the greater risk of interest-only lending, banks continue to charge higher interest rates for these loans and more carefully scrutinise their suitability for borrowers,” Mr Kearns told the Property Leaders’ Summit in Canberra on Tuesday.
“As a result, some borrowers who may have anticipated being able to roll over an interest-only period are finding they cannot.”
Financially stretched borrowers are those who would most benefit from cheaper loans. However, they are generally find it hardest to secure refinancing, Mr Kearns said.
Even in a post-royal commission environment, Mr Kearns said he thought it unlikely that banks were contributing to the rise in arrears by displaying greater forbearance in response to their own past poor lending decisions.
“In an environment of falling housing prices, allowing a borrower to remain in arrears for longer would increase the loss that the borrower, and so the lender, is exposed to,” he said.
“This wouldn’t seem to be operating in the best interests of the borrower, or for that matter even the lender.”
Mr Kearns speech came as minutes from the Reserve Bank’s June meeting revealed that RBA board members believed further falls in the cash rate were “more likely than not” when they cut it to a record low 1.25 per cent this month.
The minutes from the June 4 meeting show board members agreed that a further easing in monetary policy would likely be appropriate as the Reserve tries to stimulate the economy through lowering the exchange rate, reducing borrowing costs for businesses, and lowering interest payments on loans to households.
The minutes confirmed the RBA will monitor the jobs market as it mulls the timing of any further cuts.
The central bank’s first move on official interest rates in any direction since August 2016 followed another month of weak economic data. Most notable was an unexpected rise in the unemployment rate for April to 5.2 per cent.