Background Notes for Opening Remarks to Inquiry into Housing Affordability in Australia 3. Arrears

Housing loan arrears are the most tangible indicator of the extent to which households are getting into difficulty with their housing loans.

The series for the proportion of loans for which repayments are in arrears by more than 90 days is shown in Chart 7. The key points worth noting about this chart are that:

• While arrears rates rose somewhat between 2002 and 2006, they remain relatively low by historical standards, and in fact fell through much of 2007.
• The arrears rate for loans on banks' balance sheets is about 0.3 per cent, while that for securitised loans is about 0.6 per cent in total, or 0.4 per cent for prime mortgages. We estimate that there are around 15,000 households in Australia which are 90 days or more in arrears on their housing loan repayments. An additional 30,000 or so are between 30 days and 90 days in arrears. These are quite low numbers for a country the size of Australia.

From a macroeconomic perspective, there do not appear to be any major problems here. Indeed, given the historically low level of unemployment, it would be surprising if there was a widespread problem with housing loan arrears at present.

How do we square the relatively benign picture on arrears with the apparent sharp decline in housing affordability such as shown in Chart 5? The explanation largely lies in the fact that real incomes of Australian households have been rising quite strongly. This has allowed households to devote a larger proportion of their income to housing, while still maintaining their living standards more generally. For example, a typical household that in 1996 was devoting 30 per cent of its disposable income to debt servicing would today be able to devote 47 per cent of its disposable income to debt servicing while still having the same standard of living in terms of being able to buy other goods and services. This, broadly speaking, is the outcome that has occurred.

It is not surprising, therefore, that some commentators who use a fixed benchmark for housing stress – such as housing repayments exceeding 30 per cent of income – are finding that more and more households are exceeding the benchmark.

I should also point out that the 30 per cent benchmark is sometimes applied more loosely than was intended by those who initially proposed it. The benchmark dates back to work done for the Australian Government's 1991/92 National Housing Strategy. That work recommended that 30 per cent of income be adopted for the maximum level of housing costs for households in the bottom 40 per cent of the income distribution.^[1] Some commentators have since begun to apply it to all households, including those with very high levels of residual income. More generally, the rise in real incomes since the early 1990s has substantially changed the basis on which the 30 per cent benchmark was calculated.

While housing loan arrears for the country as a whole are quite low, there are some regions where the financial position of households is relatively tight.

The pressures seem to be particularly concentrated in suburbs of western Sydney. Various measures point to financial pressures being more intense in this area:

• First, arrears rates on housing loans in western Sydney are significantly higher than those in other parts of Sydney, or Australia more generally ( Chart 8).
• Second, suburbs in western Sydney feature prominently in lists of Australian regions with the highest proportions of households with relatively high debt-servicing ratios. Chart 9 is published by the ABS using data from the 2006 Census. It shows the proportion of households in each of the major regions of Sydney that is paying more than 30 per cent of gross income in housing costs (including rent). While, as I noted, there are some qualifications surrounding the significance of the 30 per cent benchmark, it is nonetheless the case that the proportion of households paying more than 30 per cent in housing costs is higher in areas of western Sydney than in other parts of the city.
• Chart 10 provides more detail on this. It shows the 15 regions across Australia that in 2006 had the highest proportion of owner-occupier households paying more than 30 per cent in debt servicing. Parts of western Sydney are again over-represented in this group. In the Canterbury-Bankstown region, for example, 49 per cent of households with housing debt were paying more than 30 per cent of their income in debt servicing. This compared with about 29 per cent for the Australia-wide average.

In examining why the problems of housing affordability are more severe in western Sydney than in other parts of Australia, a few key features stand out:

• First, the rise in house prices and the associated increase in turnover in this region came later than in the rest of Sydney, and the increase ended up being larger (Chart 11). An implication of this is that a higher proportion of households in this region bought towards the peak of the market.
• Second, incomes in this region have on average grown more slowly than elsewhere. Over the decade to 2006, for example, median household income grew by an average rate of 3.7 per cent per annum in western Sydney, compared with 4.2 per cent in Sydney overall, and 5.0 per cent in Australia. In other words, the rise in house prices in western Sydney was less well supported by income growth than elsewhere. As an illustration of this, even in 2001, at the low point in the interest rate cycle, a relatively high proportion of households in this part of Sydney had high debt-service ratios.
• Third, a disproportionately large share of the housing loans in this region was sourced from non-bank lenders. This may imply that a smaller proportion of the borrowers in the region met banks' lending guidelines and/or that some of those marketing the non-bank loans arranged loans that were inappropriate for some people. The arrears rate on loans from non-bank lenders in this part of Sydney is running at three times that for loans on the major banks' balance sheets. That said, it is still only about 1.5 per cent.

This combination of outcomes created substantial financial pressures in this region after the housing boom ended in early 2004, as evidenced by the sharp rise in the arrears rate in the region over 2005 and 2006. Having said that, the situation appears to have stabilised in the past year, most likely due to rising income levels.

Footnote

National Housing Strategy (1991), ‘The Affordability of Australian Housing’, National Housing Strategy Issues Paper No.2, p.7 [1]