Moody’s Investors Service has predicted moderate increases in the prime residential mortgage-backed securities (RMBS) delinquency rate in the coming quarters due to dwindling house prices, record-high levels of household debt (191 per cent of annual gross disposable income), and the large number of interest-only mortgages being converted to principal and interest loans this year and next.
According to the ratings agency, the 30-plus day delinquency rate for prime RMBS increased slightly from 1.49 per cent in September last year to 1.58 per cent in December.
The rise was attributed in part to the softening house prices, which declined by 6.3 per cent nationwide over the 12 months to the end of February 2019, with Sydney and Melbourne experiencing the largest declines of 10.4 per cent and 9.1 per cent over the same period, respectively.
For prime RMBS issued by major banks, the 30-plus day delinquency rate was 1.77 per cent in December last year, up from 1.64 per cent in September.
Delinquencies were higher for regional banks in December, at 1.88 per cent, compared to 1.85 per cent in September.
For prime RMBS issued by non-bank authorised deposit-taking institutions, the delinquency rate was 0.50 per cent in December last year, up from 0.46 per cent in September.
Despite projecting a moderate rise in delinquencies, Alena Chen, vice president and senior analyst, said the increase would be “limited”.
“Mortgage delinquencies will likely increase over the short term in areas hit by the far north Queensland floods in February 2019, as borrowers may lose income or face costs while dealing with the aftermath of the disaster,” Ms Chen added, noting, however, that flood-affected areas account for just around 1 per cent of the total loan balance of the RMBS portfolio Moody’s rates.
On the other hand, defaults and losses are expected to remain stable due to “stable” GDP growth and low unemployment. Moody’s also noted that insurance payouts, government assistance and financial hardship arrangements established with lenders will alleviate the burden on mortgagors.
The ratings agency has predicted real GDP growth of around 2.5 per cent this year and next, while the unemployment rate in Australia is projected to remain “relatively stable” at 5.5 per cent over the same period, compared to the 5 per cent recorded in December 2018.
The housing downturn has triggered some uncertainty around household consumption within the Reserve Bank of Australia (RBA), which cut its growth and inflation forecasts last month and hinted at possible cuts to the official cash rate.
However, the central bank’s governor, Philip Lowe, maintained that the housing downturn is “manageable” and will not impede economic growth, despite some analysts accusing the RBA of “underestimating” its impact on GDP growth.
“It will also have some positive side effects by making housing more affordable for many people,” Mr Lowe said earlier this month.
The governor continued: “The national experience has been that low levels of unemployment and low interest rates allow most people to service their loans, even if weak income growth means that household finances are sometimes strained.
“Our estimate is that, currently, less than 5 per cent of indebted owner-occupier households have negative equity, and the vast bulk of these households continue to meet their mortgage obligations.”