Loan arrears increase with economic downturn

Outstanding loan repayments are up across Australia with rising unemployment expected to continue to fuel the increase.

Moody’s said increases in delinquency rates would continue while economic disruptions caused by the coronavirus pandemic persisted.

Outstanding loan repayments are up across Australia with rising unemployment expected to continue to fuel the increase and contribute to a downturn in house prices.

Parts of the country depending on tourism are flagged as areas where the pain will be greatest as the coronavirus pandemic economic downturn continues, the S&P Global Ratings quarterly arrears report forecasts.

With the pandemic following the bushfires that devastated much of Australia at the start of 2020, arrears have risen in metropolitan and non-metropolitan areas, particularly for borrowers who did not originally meet standard lending criteria.

The assessment from S&P expects property prices to feel the effect of loan stress for the next six to 12 months and forecasts prices to fall by about 10 per cent.

A separate Moody’s report also released on Tuesday, flagged the 30-plus day delinquency rate for prime Australian residential mortgage-backed securities (RMBS) has increased to 1.79 per cent in the March quarter from 1.55 per cent at the end of the December.

Rising unemployment is fuelling the expectation of increased arrears, with S&P Global expecting the situation to be worse than that experienced in the 2008 global financial crisis.

S&P Global analyst Erin Kitson said mortgage arrears pointed to an ongoing downturn in the residential property market for at least the next 12 months.

“Mortgage arrears are a lagging indicator of financial stress,” Ms Kitson said. “As such, we do not expect to see the pain of COVID-19 reflected in mortgage arrears reporting until at least the fourth quarter of 2020.”

Further lags are likely to occur from the relaxation of traditional arrears reporting. Lenders are currently not required to report on loans that fall under COVID-19 support arrangements until the end of the relief period.

S&P predicted that arrears increases were likely to be more pronounced in areas of the country heavily reliant on tourism. Financial recovery is expected to be slow while ongoing travel restrictions remain in place.

“Mortgage arrears could trend higher in tourism-dependent areas where hospitality, leisure and recreation services make up a larger share of local employment,” Ms Kitson said.

“The path and pace of economic recovery in these areas will influence the extent of debt-serviceability pressures in the coming months.”

Moody’s said increases in delinquency rates would continue while economic disruptions caused by the coronavirus pandemic persisted.

S&P Global noted prepayment rates were likely to fall, with borrowers struggling to make additional payments in the current environment and refinancing prospects expected to decline for at least the next year.

WA mining downturn

Ms Kitson said arrears rates in Western Australia would remain elevated for sometime, as the state was also suffering from an ongoing mining downturn.

“COVID-19 will place upward pressures on arrears in WA, like the rest of the country, due to forecast increases in unemployment,” Ms Kitson said.

“This reflects the prolonged impact of the downturn in mining investment on debt serviceability, and its flow-on effects to property markets that have struggled to recover post-mining boom, hindering refinancing prospects for many borrowers.”

Darwin was the worst-performing postcode during the March quarter, with 7.04 per cent of loans in arrears.