OREANDA-NEWS. Australian mortgage arrears increased 16bp to 1.11% in 1Q16, due to seasonal Christmas spending, rising standard variable rates and a low real-wage growth, but remain low compared with the 1.75% peak in March 2011, says Fitch Ratings. The agency expects arrears to fall over the next two quarters once the effect of Christmas spending fades and the May 2016 interest-rate cut starts benefiting borrowers.

The 1Q16 arrears are the lowest in a first quarter in the previous decade, despite the seasonal increase being the highest in five years, indicating improved overall performance yoy. In addition, the annualised residential mortgage-backed sector loss-rate - the ultimate performance indicator - has been falling consistently since 1Q13 to 0.02% in 1Q16. Fitch says losses remain extremely low thanks to strong house-price appreciation and low default rates.

Fitch says the strong housing market, low unemployment-rate and low-interest-rate environment create favourable conditions for mortgage performance, but a sudden change in employment conditions or negative real-wage growth poses a major threat.

Recently tightened lending standards may have lowered households' capacity to borrow, but Fitch believes the standards increase mortgage market stability should the economy change.

Self-employed borrowers continue to experience financial difficulties, despite positive serviceability, and the move away from the low-doc market by many lenders has benefited residential mortgage-backed sector performance.