Enclosed below is the latest 'system' housing default data. This basically includes every balance-sheet loan in Australia, which would account for well north of 90% of all mortgages (especially given the relative demise of the securitisation market).
Arrears have picked up a bit to be around 0.7%. To place that in context, equivalent UK mortgage default rates are more than three times higher at circa 2.5% (based on RBA analysis) despite having much lower interest rates. Equivalent US default rates are over eight times higher.
Given around four and a half million home loans outstanding in Australia today, this means that there are only about 31,500 households that are more than 90 days behind on their repayments. That is, a tiny number in the scheme of things. To put this in perspective, there are about one million new home loans originated each year, and about 400,000 to 500,000 homes sales.
The RBA Deputy Governor also blows away the myth that there is a surge of first-time buyers who took out loans during the GFC (with the help of the Government's bonus) driving up default rates:
"Another potential source of vulnerability in the housing market that is often mentioned is the many first-home owners who were attracted into the housing market in 2009 by the increase in the first-home owner grant. The concern is that some of these may have over-committed themselves financially in order to enter the market, and are now vulnerable to rising interest rates. This group bears close watching but, so far at least, first-home owners do not seem to be disproportionately represented in loan arrears."
As a final comment on defaults, there is a possible upward bias in the data, as household credit growth has been trending down to low levels since 2005-06. This has increased the average age of a loan that is outstanding. And because default rates peak after around year three, the rise in the average seasoning in the loans outstanding, combined with the gradual increase in interest rates to levels that are slightly above-average, may have boosted Australia's overall default rate. The bottom line, however, is that current default rates are very low. Having said that, we think there is a risk they may edge up a bit further if our central case of 2-3 hikes over the next 12-18 months comes to pass. This obviously needs to be balanced against a 4.85% unemployment rate and solid 4% pa wages growth.
Battellino also relays two points I have made regularly here over the years: first, the rapid credit growth in the 1990s was a once-off level change brought about by the near-halving in average interest rates as the RBA secured price stability and low inflation for the first time in a long time; and, second, we can expect low single digit credit growth going forward, in line with nominal disposable incomes. This in turn has consequences for the growth rates banks can sustain. Or, in Battellino's words:
"History tells us that periods of weak credit growth such as the present one are relatively short-lived in a growing economy, so some pick-up in credit growth is to be expected. It would be wrong, however, to think that this means a return to the growth experienced in bank balance sheets in the period since the mid 1990s. That was an extraordinary period, driven by what was largely a one-off adjustment to household gearing following financial deregulation and the sustained fall in inflation. In the economic climate likely to be faced by banks over the next few years – solid economic growth but with cautious behaviour by households and relatively low inflation – it would be reasonable to assume that the rate of growth in credit will remain somewhere in the single-digit range. That rate of credit growth should be able to be matched by deposit growth, reducing the need to raise funds in wholesale markets."
