Rising risk of mortgage defaults

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October 25 2016
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The proportion of Australian residential mortgages that are more than 30 days in arrears has risen to “the highest level in three years” and will continue to rise, a report has revealed.

The Moody’s Investors Service report found that the risk of defaults and the number of credit negative residential mortgage-backed securities (RMBS) was rising, with a 1.5 per cent spike in mortgage arrears in the year ending 31 May 2016, up from 1.34 per cent the year earlier.

According to the Sector In-Depth report, “the impact of lower commodity prices, rising underemployment and a less favourable housing market are said to have had a negative influence on the ability of borrowers to meet mortgage payments, leading to higher delinquencies”.

Mortgage performance “deteriorated” in all eight states and territories over the year to 31 May, with regions and postcodes exposed to the resource and mining sectors dominating the list of areas with the highest rate of mortgage delinquencies.

Following the end of the mining boom in 2014, Western Australia “fared the worst” in terms of mortgage performance, with the 30 days and over delinquency rate increasing by 0.69 per cent to 2.33 per cent overall.

The report said the Western Australian economy is “heavily reliant on the resources sector” that “relatively poorer economic and housing market conditions in Western Australia contributed to the historically high level”.

The Northern Territory and Tasmania also hit “record high levels”, as the domestic economy (excluding exports) decreased by 13.5 per cent during the last financial year, while the unemployment rate increasing to 7.2 per cent, alongside a fall of 0.5 per cent in average weekly earnings in Tasmania contributed to the state’s high levels or mortgage arrears.

In other parts of the country, mortgage arrears rose in Queensland by 1.75 per cent, Victoria by 1.46 per cent, South Australia by 1.86 per cent and the ACT by 0.82 per cent over the last year.

Meanwhile, delinquencies in NSW fell over the last three years, as housing rose by 9.39 per cent over the year to 31 August.

In addition to a supportive housing market, mortgage performance in NSW “has benefitted from the good economic and labour market conditions” with low interest rates and a weaker Australian dollar resulting in “strong household consumption, private investment and a pick-up in education and tourism sectors throughout the state”.

“Income growth in Australia has not kept pace with growth in home prices, posing an additional risk to mortgage performance,” the report said.

“Higher debt levels make households more vulnerable to economic or housing market shocks and make meeting mortgage repayments more difficult [and] we expect that mortgage delinquencies will continue to increase moderately for the remainder of 2016.”

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