The Investors Service released a new RMBS research report which noted that while mortgage delinquencies (of 30 or more days in arrears) fell from 1.52 per cent in November 2016 to 1.45 per cent in November 2017, it predicted that delinquencies are likely to rise this year in response to slowed housing market activity.
In its RMBS Australia: Mortgage delinquency map, Moody’s vice president and senior analyst Alena Chen said: “Softening housing market conditions, particularly in the key states of NSW and Victoria, will drive delinquencies moderately higher.
“NSW and Victoria are the two states most susceptible to a slowdown in the housing market, given that house prices in both states increased considerably over the five years before prices declined in recent months.”
However, Moody’s noted that “strong mortgage performance” in NSW and Victoria has helped “offset rising delinquency rates” in the source sector states, with NSW accounting for 31.41 per cent and Victoria accounting for 25.17 per cent of its Australian residential mortgage portfolio.
As such, the ratings agency predicted that housing market cooling in NSW and Victoria could tip the balance.
“[As] the housing market cools, weaker mortgage performance in NSW and Victoria will drive the Australia-wide mortgage delinquency rate up,” the report reads.
Further, Moody’s claimed that slow wage growth, high household debt, “persistently high” underemployment and the “unwinding of the mining investment boom” could also contribute to a future rise in arrears.
In addition, average weekly earnings in Australia have increased just 10 per cent over the five years to March 2018, a period over which house prices have increased by an average of 40 per cent.
Moody’s said: “As a result, households have accumulated record levels of mortgage debt in the past few years. Household debt as a proportion of disposable income was 188 per cent in September 2017 compared with 161 per cent in September 2012.
“This increase in household leverage poses a downside risk for mortgage performance. Higher debt levels make households more vulnerable to economic or housing market shocks, and make meeting mortgage repayments more difficult, increasing the risk of delinquencies.
“Persistently high underemployment could also lead to higher mortgage delinquencies in 2018. Australia’s unemployment rate was 5.56 per cent in February 2018, slightly below the 5.79 per cent average for the last five years.
“However, the underemployment rate is much higher at 8.37 per cent and is above the 8.23 per cent average for the last five years. Underemployment results in lower income and reduced capacity to make mortgage repayments, increasing the risk of delinquencies and defaults.”
The report also noted that “less favourable income dynamics and ongoing volatility in the resources sector will also weigh on mortgage performance.”
Despite predicting a future rise in delinquencies, Moody’s research found that in November 2017, arrears dropped in all states except NSW, where arrears rose by 6 basis points from 0.94 per cent to 1.00 per cent.
Arrears were highest in Western Australia (2.50 per cent), followed by South Australia (1.89 per cent), the Northern Territory (1.81 per cent), Queensland (1.69 per cent), Victoria (1.28 per cent) and Tasmania (1.26 per cent).
Delinquencies were lowest in the Australian Capital Territory (0.76 per cent).
Moody’s noted that the 10 regions with the highest rate of arrears over 30 days were in Western Australia and Queensland, with Queensland’s Barney Point topping the list.
Conversely, eight of the 10 regions with the lowest delinquency rate were in NSW, seven of which were in Sydney. Sydney’s North Beaches topped the list with an arrears rate of 0.34 per cent in November 2017.