Moody’s Investors Service’s latest RMBS Australia report has revealed that mortgage delinquencies and defaults are more likely in the outer suburbs of Australia’s capital cities.
The Moody’s analysis found that across Australia’s capital cities, the share of mortgages that are at least 30 days in arrears averages 1.1 per cent in locations within 5 kilometres of central business districts (CBDs), compared with 1.9 per cent in suburbs 30 to 40 kilometres from CBDs.
“In the residential mortgage-backed securities (RMBS) we rate, delinquency rates are in many cases higher in deals with relatively large exposures to mortgages in outer areas,” Moody’s stated.
The ratings agency noted that “socioeconomic conditions are typically weaker in outer suburbs than in inner-city areas”.
However, Moody’s noted that while delinquency rates are highest in areas the furthest away from the CBD, suburbs within 5 kilometres of the CBD in most Australian capitals have higher arrears rates than suburbs within 5 and 10 kilometres of the CBD.
Moody’s attributed the disparity to the higher number of investment and interest-only loans among borrowers closest to the CBD.
“In Melbourne, Brisbane, Adelaide and Perth, arrears rates in suburbs closest to the city centre (within 5 kilometres) are slightly higher than those a little further out (5 to 10 kilometres),” the report noted.
“[This] reflects the high share of mortgages on investment properties in areas closest to the city. For example, in suburbs within 5 kilometres of the Melbourne CBD, delinquent investment loans account for 57 per cent of all mortgage delinquencies.”
Moody’s added: “The high share of housing investment and interest-only loans in inner-city suburbs poses a risk in these areas. In suburbs within 5 kilometres of the CBD in Sydney, Melbourne and Brisbane, at least 50 per cent of mortgages are extended for investment purposes, [with] these areas also [having] a high share of interest-only loans.”
The ratings agency stated that while housing investment and interest-only loans “have generally performed well over recent years, given benign economic conditions and rising property prices”, the performance of such loans is “more sensitive” to a drop in property prices, adding that arrears are also likely to rise when interest-only terms expire.
“Falling housing prices can also hamper borrowers’ ability to refinance such loans or extend interest-only terms,” Moody’s continued.
However, Moody’s concluded: “In the event of a prolonged downturn in housing prices, mortgage delinquencies and defaults could increase in inner-city areas with a high share of investment and interest-only loans, though in general we expect delinquencies and defaults to remain higher in outer suburbs.”
[Related: Arrears 21 bps higher year-on-year]