Massive Surge In March Quarter Bad Debts 'unsurprising'

The Age

Friday July 18, 2008

Tim Colebatch and Daniela Miletic

HOME buyers and other borrowers defaulted on payments on a record $3.5 billion of bank mortgages and other loans in the March quarter, as higher interest rates pushed them over the brink.

Reserve Bank figures released yesterday showed the ratio of bank assets that are impaired - that is, on which borrowers have fallen behind on payments - shot up in three months from 0.19% at the end of December to 0.31% at the end of March.

It is the most dramatic surge in bad debts since these records began in 1994, reflecting how many households found themselves unable to cope with repeated interest rate increases.

The banks' standard mortgage rate rose from 8.05% at the end of July 2007 to 9.35% by March 2008. It has continued rising since, and is now 9.6% - adding more than $100 a month to the cost of servicing a typical $250,000 mortgage.

CommSec analyst Savanth Sebastian said the rise in bad debts was massive, but not surprising. "The credit crunch has seen banks clean up balance sheets, advocating a more conservative view than in recent years," he said. "Decade-high interest rates, increased share market volatility and slowing domestic growth have seen a marked pick-up in the number of borrowers not meeting contractual obligations."

But Mr Sebastian said there was no need to fear for Australia's banks. "Comparing Australia's banks to US counterparts is like comparing chalk and cheese," he said. "Australian banks continue to gain market share, while bank deposits are growing at a healthy rate."

The increase in bad debts is startling, but even at 0.31% of assets, they are only a fraction of the 2.5% of bank assets classed as impaired in 1994.

Other Reserve Bank data yesterday showed high interest rates and petrol prices were causing Australians to become more thrifty with credit cards, with balances per card growing at the slowest pace in 13 years.

The average card balance stood at $3115 in May, up $30 from April. The average outstanding balance fell from $2253 to $2252.

While purchases using credit cards increased by 0.6% in May to $17.16 billion, repayments rose by 4.5% to $18.325 billion.

But with the number of cards up 5% in the year to May, outstanding balances were 10% higher than a year earlier. There are anecdotal reports of home buyers avoiding default on mortgage payments by putting them on credit cards.