Hey guys and welcome to Finance and Fury! Today we’re joined again by Jayden to talk about whether property prices will keep declining due to higher mortgage arrears.

The RBA’s cookie cutter approach to rates will continue to try and help reduce chances of mortgage default and ease burden on household cashflow.

Why is it that an increasing share of housing borrowers are behind in their mortgage repayments?

  1. Points to a rising risk to the financial system as housing loans are 40% of banks assets directly
    • This is in addition to trillions sitting in derivative style instruments which use these mortgages as their underlying assets
  2. When the property backing the loan exceeds the value of the loan then arrears aren’t a big deal for banks. They take the deed of your home and take back their loan (plus unpaid interest/costs).
  3. With falling housing prices however, the potential for banks to experience losses increases.

Where are arrears at

  1. While it is increasing, the rate of arrears in Australia is still relatively low compared to internationally. In Australia is should be noted that over 99 per cent of housing loans are on time, or ahead of schedule.
  2. Making loans involves risk – banks are used to managing this risk.
  3. But when arrears rates are persistently very low, that would suggest that lenders were being too cautious in lending
  4. Part of the problem with our economy is that loans aren’t going to businesses (real growth drivers like wages) they go into houses. Our loans are fully recourse, unlike the U.S. for example.

Banks Non Performing Household Loans

Why borrowers fall into arrears; there’s no single one cause, but often a combination.

  1. A fall in income or a rise in expenses, or both.
    1. Personal misfortune, such as unemployment, ill health or a relationship breakdown, which is unrelated to economic conditions or the quality of their loan
      • Clear pattern of more loans going into arrears in locations where the unemployment rate is higher
    2. Increases in interest rates
  2. Weak economic conditions
    1. Borrowers can struggle to make their payments if their income falls.
    2. Weak conditions in housing markets make it hard for borrowers to get out of arrears by selling their property.
    3. Rate of income growth
      • Nominal income is rising strongly, over time, mortgage payments take up a declining share of a borrower’s income.
      • Nominal income growth has been around half its longer-run average
    4. Banks’ lending standards also play a role in arrears.
      • Poorer quality loans might continue to perform well in good economic conditions, and only fall into arrears with an economic downturn.
      • Assessment and size of lending adds risks
        • Drives prices up as well – if rates go up, it’s a worse scenario

 Non performing household loans by country

Summary

  1. Housing arrears have risen but by no means to a level that poses a risk to financial stability
  2. Weak income growth, housing price falls and rising unemployment in some areas have all contributed.
  3. Australians amassed one of the world’s highest levels of household debt in a five-year property boom amid a combination of low interest rates, lax lending standards and supply shortage.
  4. Prices have since tumbled, with Sydney’s down about 15% from the 2017 peak – People just aren’t selling their property as nobody is buying – so people who are in arreras wont want to sell at a loss – nor would the banks

How to “Arrears-Proof” yourself

  1. Accumulated buffers of prepayments of their mortgage, and some others have other assets outside of property. Households with financial buffers can withstand some period of unemployment, but if that extends too long and depletes their savings, they risk falling into arrears
  2. Budget and know your numbers – stress test whether you can afford a 2% rise in rates, or if you lost your job for 2 months
    • Get insurances in case you are injured and can’t work

Links

https://www.bloomberg.com/news/articles/2019-06-17/australia-mortgage-arrears-rise-to-2010-highs-rba-s-kearns-says

https://www.macrobusiness.com.au/2019/06/sp-mortgage-arrears-keep-climbing/

https://www.macrobusiness.com.au/2019/06/lunatic-rba-surging-mortgage-arrears-no-risk/

 

How to create a rising share market?

  Welcome to FInance and Fury, the Furious Friday Edition.  Following the series of the Lucky Country – You don’t need to have listened to the last few FF eps for this one – rare event – but will be talking about a few related factors, like GDP growth, Interest...

Furious Friday: How do we avoid the decline into a recession?

Welcome to Finance and Fury the Furious Friday edition Today we are continuing the discussion around supply-side economics We will talk about the best ways to avoid declining into a recession as an economy and some solutions for economic growth. Last Friday we talked...

Say What Wednesdays: The Trump Economy

Say What Wednesday The Trump Economy Today, we’re talking about the Trump economy, and the state of the US market. Love him or hate him, America is doing better than ever – Trump just can’t stop winning when it comes to a lot of political and economic factors. In his...

Welcome to CHAZ! Is it the manifestation of a behavioural sink or a true revolution against authority?

Welcome to Finance and Fury, the Furious Friday edition. Been watching a very interesting social experiment play out – the rise of the nation of CHAZ – Capital Hill Autonomous Zone – If you haven’t heard about it – it is a LARP – live action role playing for an...

What are the proposed changes to the responsible lending laws and what this means for Australian borrowers and the economy at large.

Welcome to Finance and Fury, the Furious Friday edition. In this episode – we will be going through the potential changes to the current Responsible lending laws that may occur next year – as these laws will either be watered down or completely removed -   As it...

An economic and fiscal update and examining the 2020 budget

Welcome to Finance and Fury Budget came out last week – this episode – go through the fiscal overview and the policy measures in it Fiscal overview – provided updates on the government budget position and economic updates Government – added $289 billion in fiscal...

How do negative yielding bonds work and why would anyone buy them?

Welcome to Finance and Fury, The Say What Wednesday Edition This week Question from Mark – two-part episode (over this week and next) Hi Louis I have 2 questions, can you explain how negative yielding bonds work, they are saying a third of the global bond market is in...

How to use your home for Investments

Welcome to Finance and Fury Today we have Jayden here, and we will be talking about using your home for as an investment and as a forced savings account. You can start turning the bad debt into good debt. Through paying down the loan quicker, and then redrawing on the...

Furious Fridays: The Devil giveth and the Devil taketh away

Furious Friday The Devil giveth and the Devil taketh away Welcome to Finance and Fury! If you haven’t listened to last Friday’s episode go check it out, it’s a prelude to this episode. Today we are going to discuss the founder of Communism – Karl Marx, along with his...

(Intro Series) From ‘Puzzle’ to ‘Map’

Intro - Episode 3 From 'Puzzle' to 'Map' Welcome to the 3rd part of the intro series for Finance and Fury. Today let’s start with a bit of time travel. Picture 1500’s, London. All the guys have hipster like facial hair, accessories, the big beards, the little curly...

Pin It on Pinterest

Share This