Perhaps one contributing factors to the formation of residential property “bubbles” or “overshoots” across the world over the years is the lengthy leads and lags between the start of a “negative” economic event, such as an interest rate hiking cycle, and the start of a rising trend in bad debt levels.
These lower turning points in the bad debt cycle are particularly dangerous periods for mortgage lenders. This is because, after interest rates begin to rise, it is often the case that for a lengthy period of time one doesn’t see any noticeable rise in bad debt/arrears levels.
During this period, the risk is that the mortgage lending sector can begin to mistakenly believe that it is “bullet proof”, or that the risks are lower than it previously thought. After all, a supposedly negative economic event has taken place but little or nothing bad has happened to mortgage loan arrears levels. The conclusion can possibly be that lending has been of such a high quality that home loans books can withstand these negative events.
Recent times possibly are a case in point. Economic growth has been weakening (although not in recession yet), and interest rates have been rising, but very little in terms of rising arrears/non-performing loan levels has been evident yet.
There are a few possible reasons for this.
Read more here: FNB Mortgage_Barometer_Financial_Stress_5_May_2016