The key focus of Moody’s Sector In-Depth report was to provide an overview and comparison of the key features of the mortgage market within Asian Pacific countries, such as Australia and New Zealand.
The report indicated that housing prices in Australia and New Zealand are increasing, with housing price appreciation focusing in Sydney and Melbourne which are “underpinned” by low interest rates, population growth, supply constraints, foreign demands and speculative investment.
Analysts suggested, however, that they “expect housing price growth to moderate over the next 12 months reflecting increased supply of new housing and tighter lending standards”.
The report highlighted that mortgage underwriting criteria in Australia and New Zealand have recently been tightened due to changing regulatory measures, and in Australia, criteria and serviceability tests for housing investor loans have been tightened over the last 12 to 18 months in response to “regulatory steps to limit growth in such loans”.
Similarly, some lenders have also restricted lending for the purchase of newly-built apartments in some areas owing to concerns about “an oversupply of new buildings”, as seen in cities such as Sydney and Melbourne.
The report discussed loan repayments in the market, stating “repayment types do vary” over standard 25 to 30 year terms, with Australian mortgages generally implementing floating-rate loans which often begin with an initial fixed-rate period of five years.
The report also suggested that fixed interest rate mortgages generally had a lower risk than floating-rate mortgages as “borrowers are less likely to be adversely affected by interest rate increases”, however fixed interest rates also presented “a higher market risk for lenders as interest earning on mortgages can be below the market rate if market rates increase over time”.
Alternatively, some Australian and New Zealand lenders offer mortgages with interest-only type loans over a period of two to five years, with “30 to 40 per cent of mortgages” with this payment set-up.
The report also found that housing investment mortgages were riskier than owner-occupier mortgages as borrowers are “less likely to default if the home they live in is at stake”.
In both countries, enforcement for defaulted obligors involves the sale, and often the auction, of their mortgaged properties and lenders who have the first mortgage on properties can typically receive the enforcement proceeds ahead of other creditors of the borrower.
While Moody’s Investors also discussed trends in other Asian Pacific countries, such as Singapore and South Korea, they noted that mortgage and covered bond markets “show[ed] similarities with more established markets, but also specific differences”.
Research found that mortgage loan repayment types varied, however Singapore proved to be the “least risky because it permits only fully amortizing principal repayment mortgages”.
[Related: Banks warned of growing housing market risks]