Mortgage arrears in WA increase, will first home owners make it worse?

Western Australia is experiencing higher levels of mortgage arrears due to a downturn in the mining industry, but arrears in New South Wales are continuing to fall, it is revealed in new figures from the Reserve Bank of Australia.

According to the RBA’s biannual Financial Stability Review, New South Wales continues to hold the highest number of mortgage arrears overall with repossessions claiming about 0.22% of homes, but repossessions in Western Australia have climbed from about 0.09% in 2007 to just under 0.12% in 2009.

Separate figures also show about 25,000 homes are thought to be 90 or more days with payments outstanding in Australia, an increase of 2,000 over the last 12 months.

Harley Dale, chief economist for the Housing Industry Association, says the main reasons behind the foreclosures are due to the housing boom that came along with growth in the mining industry.

“If you go back a couple of years, house prices in Western Australia were just doing ridiculous things, I mean at one point you had annual price growth at 45% annually and that’s just unsustainable. People at the tail end of that massive boom subsequently found it difficult.”

Similar concerns about growing property prices have been raised for the rest of the country, with the Reserve Bank commenting on the increased average size of loans for first home owners in its new report.

The RBA said these large loans, traditionally over-sized for first home owners, were an “unusual outcome” when compared to previous standards.

Separate figures from the Australian Bureau of Statistics show the average loan size for first home owners grew from $246,500 on year ago to $269,100 during July.

Additionally, sales of new homes reached a 19-month high last month, with figures from the Housing Industry Association showing sales to first home owners grew by 11.8% during August.

The high number of sales, and the increased size of the average loan, has prompted fears of a time-bomb for arrears and foreclosures due to eager first home owners borrowing more than they can afford. Some property experts have warned rising interest rates will catch out first home owners in the next few years.

But Dale says this is unlikely to be the case due to tightened lending criteria, and says the size of the average loan isn’t necessarily due to people borrowing more they can afford but is the reflection of a demographic shift of the first home owner.

“I’m skeptical, because I’d be surprised if the banks let this go by when they are actually tightening lending conditions. Additionally, lenders take into account rising interest rates and that sort of thing.”

“The other thing to keep in mind is that the demographic of the first home owner has changed over the past decade. When affordability was quite low for a long period, many people waited to buy, and now they are five or so years older, have more income and so on, and so it’s not surprising the average loan size will increase because these people are buying different types of property.”

Australian Property Monitors economist Matthew Bell agrees, and says any increase in arrears will be due to other factors associated with a downturn, such as unemployment, and not eager first home buyers.

“I don’t think this increase is any big surprise. You always get an increase in arrears as a late impact from the downturn, but the fact remains our level of arrears in Australia is internationally very low, and if they do climb, they will climb from a very low base. This is a manageable arrears problem and not a massive debt problem.”