First home buyers who take out a mortgage in today’s market pose a significant risk to lenders due to changing labour conditions, peaking property prices and potential rate hikes, according to Fitch Ratings.
While soaring Sydney property prices and record-low rates have been a blessing for existing home owners, Fitch Ratings has warned that the same environment has made new borrowers a significant credit risk for mortgage providers.
Speaking at the Australian Securitisation Conference in Sydney yesterday, Fitch Ratings managing director Ben McCarthy told delegates that these are some of the issues that keep him and his team up at night.
“If you look over the last four years, house prices in Sydney have risen by more than 60 per cent and incomes have risen 13 per cent,” he said.
“There are two ways of looking at this. For those that are already invested in RMBS or for those borrowers who bought four years ago, your house price is up 60 per cent in Sydney, your income is also up and interest rates have fallen over that time so you would expect your performance to be as good as ever.”
However, for new borrowers the picture is not so pretty. According to Mr McCarthy, the borrower who takes out a home loan today needs a larger deposit than ever before.
“They are also potentially buying at the peak of the market and in a market where incomes are projected to be stagnant in the future,” he said.
“Interest rates are at their lows and potentially going up so that borrower, from our point of view, we consider to be the highest risk borrower in the portfolio.”
Mr McCarthy pointed to a changing labour market where underemployment has been rising despite the unemployment rate remaining steady in October at 5.6 per cent.
A closer look at the ABS labour force figures shows a continued decline in trend full-time employment since December 2015 and an increase in part-time jobs.
Fitch Ratings fears that if the underemployment trend continues mortgage portfolios will come under pressure.
“We have traditionally looked at unemployment as the lead indicator of defaults in mortgages,” Mr McCarthy said.
“One of the things we noticed more recently was that arrears were rising at a time where on a seasonality point of view they should have been falling,” he said.
“One of the potential reasons for that is the underemployment. That’s a bit of a concern.
“If we move further towards underutilised labour then that does put pressure on our mortgage portfolios and would be negative for consumer debt.”