The Commonwealth Bank has reported a rise in the number of mortgage borrowers who are defaulting on payments, bolstering the fears of property experts who believe home owners are no longer able to meet their debts due to rising interest rates.
The revelation from Commonwealth Bank also comes after similar statements were made by ANZ and Westpac within the past weeks, with both banks forecasting more rises in arrears.
Commonwealth Bank chief executive Ralph Norris also said yesterday he expects the number of arrears to increase as interest rates rise – some experts predict a rise could even occur in June.
While an exact figure was not revealed, chief financial officer David Craig reportedly said the rise was “very much consistent with both the ANZ Bank and Westpac… We’re all seeing exactly the same phenomenon”.
Fairfax reports the Commonwealth Bank recorded a jump of 11% in missed payments during the March quarter. The bank was contacted for further clarification, but no reply had been received before publication.
Last week Westpac said the number of 90-day delinquencies on its books rose from 47 basis points to 57 basis points since last September, while ANZ also said arrears increased. Both banks believe the rise isn’t substantial and won’t have a negative effect on earnings.
But the rise comes after a Fitch Ratings report released in March found the number of delinquent mortgages in Australia rose in the third quarter of 2010, with 90+ day arrears rising to 0.54%.
Fitch analyst Natasha Vojvodic says this is a definite trend and it looks set to continue, especially as first home owners start seeing the “buffer” in their repayments – the amount added on top of the minimum repayment amount to account for future interest rate increases – start to erode.
“We are trying to drill down into what’s going on, and see what’s happening where,” she says, but adds interest rates are the most likely culprit.
“During the last couple of years unemployment has been a big driver of arrears. But unemployment has been going down, and in the absence of that fact it appears to be interest rate increases that have been driving arrears.”
The banks have said it is the amount of mortgages given out during the 2007-09 years that is behind the rise in arrears. And experts say the main buyers during that period – first home owners – are the ones experiencing the current pressures.
“If a large percentage of these mortgages originated during that period, then potentially it could be first home buyers. As interest rates erode their capability to pay, it could get worse.”
But Australian Property Monitors economist Andrew Wilson says if the economy remains strong – which most forecasters believe to be the case – incomes will rise soon enough.
“This is the other end of the scale we’re seeing after the withdrawal of first home buyers – the impact of those interest rates on the owners. This was expected, and we are essentially having to wait for incomes to catch up with prices.”
“We do have a rebalancing period right now, and soon we will see people with the capability to meet those mortgage repayments. And because we have a property shortage in most centres, the trend will move back towards the seller eventually.”
But there are signs the property market may not be stabilising as much as once thought. SQM Research figures released last week show stock in Melbourne has doubled, while listings have increased over the past year by 68% – managing director Louis Christopher predicts a 5-10% drop in prices.
But Wilson says the proof is in the economic growth.
“We do have a multi-speed economy, and it is true that some areas are doing better than others, just like home owners will do better than others in terms of being able to increase their incomes.”
“But what we are looking for is that adjustment process, whereby incomes will catch up with prices and mortgage costs. And that is occurring now.”
Vojvodic agrees, and says while the trend is set to continue, the property market is a long way off from being negatively affected by arrears.
“They will keep increasing, but we’ve historically had such low arrears compared to the rest of the world and we’re still there.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
