Rising unemployment a ‘key concern’ for mortgage defaults

Standard & Poor’s has warned that a substantial increase in unemployment and associated decrease in disposable income is a ‘key concern’ that could worsen mortgage arrears and defaults.

Released yesterday, the S&P report, An Overview Of Australia's Housing Market And Residential Mortgage-Backed Securities, found that rising unemployment and its associated impact on household income “can quickly change a borrower's position”.

Australia's unemployment rate began declining after the early 1990s recession to reach a historical low of 4.1 per cent in early 2008, according to the report.

The jobless rate began to rise in mid-2008 to around September 2009, reflecting weakening economic conditions. After reaching 6.0 per cent in October 2009, the unemployment rate has hovered around 5.0 per cent to 6.0 per cent since September 2010.

“It has been between 5.5 per cent and 6.0 per cent in more recent times,” the report noted.

“We expect employment growth to be relatively flat in the short to medium term, reflecting the more subdued labor-demand conditions outside of the mining sector.”

According to the Australian Bureau of Statistics, unemployment jumped in January to its highest level in 13 years.

AMP Capital chief economist Shane Oliver recently observed that over the past year unemployment has drifted up from 6 per cent to 6.4 per cent.

“While employment rose by 185,000 over the last 12 months, this has not kept pace with the labour force, which expanded by 223,000 and so the trend in unemployment remains up," Mr Oliver said.

RBA governor Glen Stevens has also noted the trend, most recently in his statement on monetary policy following this week’s cash rate announcement.

“In Australia the available information suggests that growth is continuing at a below-trend pace, with domestic demand growth overall quite weak," the statement said.

“As a result, the unemployment rate has gradually moved higher over the past year.

“The economy is likely to be operating with a degree of spare capacity for some time yet.”

While the unemployment rate shows a clear upward trend, S&P lists a number of factors that suggest an economic slowdown may have a limited impact on the overall default level.

The S&P report found that a range of structural features in the Australian housing market have likely helped to make borrowers and lenders more conservative.

“For example, because housing loans are full recourse, borrowers have a stronger incentive to avoid overcommitting themselves and to avoid default. Furthermore, there is a strong social stigma attached to default and limited options for credit-impaired borrowers,” it said.

Meanwhile, the Responsible Lending Conduct Obligations of the National Consumer Credit Protection Act ensure minimum standards in verifying consumer information and assessing borrower capacity by credit providers.

Regulators also continue to reinforce prudent lending standards, as outlined in APRA’s latest prudential practice guide, released in November last year.

The S&P report found that more than 67 per cent of Australian households live in owner-occupied dwellings. Of these, 46 per cent own their properties outright, without a mortgage.

However, the proportion of homeowners without a mortgage has decreased, contributing to an increase in household indebtedness.

S&P warned that the falling level of free-and-clear ownership – the ratio for which has decreased by 10 percentage points in 12 years – would exacerbate the effects of a severe downturn.

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