Would recent policy changes abate worsening home-loan arrears in Australia?

While the easing of the housing downturn provides relief to homeowners, rising cases of home-loan arrears seem to give a bleak outlook to what is in store for them, especially to those who are caught in a debt trap, according to new research by credit ratings agency Standard and Poor's Global.

The study said home-loan arrears are at their highest level since the aftermath of the global financial crisis. In fact, longer-dated arrears — or those which are above 90 days — are 0.79% as of March this year, higher than the long-term average of 0.42%. Around half of these loans are in Queensland and Western Australia.

Also Read: WA borrowers struggle to pay mortgage loans

Standard and Poor's analyst Erin Kitson told ABC News that the sluggish wage growth, high levels of household debt, and the softening economy would likely keep arrears elevated in the months to come.

"Tougher refinancing conditions will continue to hold down prepayment rates by restricting borrowers' ability to self-manage their way out of mortgage stress," he said.

The report cited recent policy changes targeted to improve the housing market. However, it noted that these would provide little relief to those who are debt-ridden.

The table below shows five key policy changes and how they could impact home-loan arrears.

Recent market developments and their impact on home-loan arrears
Policy	Impact
APRA proposes removing 7% interest rate floor for debt serviceability calculations	Most households unlikely to significantly increase borrowing capacity. Could improve access to mortgage credit for some lower-income households and first-home buyers, who borrow closer to the maximum loan limit. Expense-verification processes will still affect access to credit.
Policy certainty around proposed property-related taxes	Policy certainty likely to stabilise property market sentiment and vendor confidence in the short term. It’s less likely to affect arrears performance, which is more sensitive to debt serviceability pressures.
Introduction of low- and middle-income tax offsets	May provide some short term relief but minimal long term impact on debt serviceability for most borrowers.
Increased likelihood of further rate cuts	To the extent it’s passed on, it will provide some relief. Effect of further rate cuts is likely to be smaller than in the past, given the high level of household debt.
Proposed first home loan deposit scheme	Too early to tell. Borrowers with no established credit history taking on high loan-to-vale (LTV) ratio loans in a falling property market increases risk of negative equity.
	Source: SP Global

Factors influencing arrears

The report also looked at the factors that played a role in the increase in home-loan arrears. Kitson said many factors worsened this year compared to the previous peak of prime loan arrears in March 2012.

Also Read: Housing downturn spells trouble for jobs market this year

"What was different and where things got worse were household debt was much higher, underemployment was also higher and wage growth was lower. Those factors are having a big effect," he said.

This table shows the factors affecting arrears and how they stood in March 2012 and in March 2019:

Factors influencing arrears performance
	March 2012	March 2019
Unemployment rate	5.2%	5.1%
Underemployment rate	4.6%	8.6%
Annual wage growth	3.6%	2.3%
Household indebtedness	159.5%	189.6%
Standard variable interest rate	7.4%	5.4%
Prime 30+days arrears	1.6%	1.5%
		Source: SP Global