Residential mortgage arrears numbers have become a popular topic for the Australian media. In the wake of the RBA’s sharp cycle of interest rates hikes, there has been no shortage of reports on the latest monthly arrears figures, often written alongside vigorous speculation about what the figures imply about the future of property prices, borrowers and the broader economy.
However, arrears numbers are typically reported in absolute terms with little consideration around seasonality or underlying trends. In ignoring such considerations, this can lead to short sighted and even misinformed conclusions about the strength of the underlying borrowers, the mortgage industry and the economy as a whole.
Our starting point in examining mortgage arrears seasonality is the often cited Standard and Poor’s Prime RMBS Arrears Index (known as the Prime SPIN). This is the longest continual data series of Australian mortgage performance and tracks ~$75bn of Australian prime mortgages (as at February 2024).
We analysed the past 14 years of data from the Prime SPIN to assess any possible effects of seasonality on mortgage performance. The chart below shows month on month change in arrears across the past 14 years, with a positive number representing an increase in arrears during that month.
There is a clear picture in how arrears evolve throughout a year, with the start and end of the calendar year coinciding with a spike in arrears. In fact, for the month of January, in every year since 2010, arrears have risen during that month. Inversely, the analysis also shows arrears having fallen in every month of August for the past 14 years. These trends are not surprising and align with holiday periods and Christmas spending where borrowers may temporary fall behind on payments before catching up through the rest of the year.
Ultimately, when investors consider mortgage arrears, it is critical to recognise the effect of seasonality. In doing so, this means investors are better positioned to 1) identify structural shifts in performance 2) understand when rising arrears are expected (and when it isn’t), and 3) filter out conclusions formed on superficial analysis.
Disclaimer
This commentary is prepared by Aquasia Pty Ltd ABN 20 136 522 051, AFSL 337872 (Aquasia) for general information purposes and does not constitute financial or investment advice or recommendation or an offer to buy or sell any financial product. It does not take into consideration any person’s objectives, financial situation or needs and should not be used as the basis for any investment or financial decision. Past performance is not a reliable indicator of future performance.
