Disaster risk to home loans, prices on the rise: Moody’s

Growing frequency of hazardous events raises risks for loans and house prices, Moody’s warns.

Lewis Bau in the remains of his home in Bowen after Cyclone Debbie in 2017. Picture: Evan Morgan

The growing frequency of natural disasters in Australia is raising risks for home loans and house prices, according to Moody’s Investors Service.

The rating agency on Monday warned the increase in hazardous events was credit negative for Australian residential mortgage-backed securities — a type of bond comprising pooled home loans — because of the likelihood of higher delinquencies and losses in the mortgages backing the deals.

Such disasters could also result in significantly lower property values in affected areas, it said.

“Natural disasters can disrupt economic activity and reduce incomes, as well as lower property values in affected areas, all of which raise the risk of mortgage delinquencies and losses,” Moody’s associate analyst Joanne Kung said.

However, the geographic diversity of residential mortgage-backed securities pools, insurance payouts and financial relief offered by lenders and governments would help mitigate the impact on the performance of the mortgage bonds, she added.

Mortgage delinquency rates in rated residential mortgage-backed securities saw a modest increase following recent natural disasters in Queensland and New South Wales, Moody’s research found, but the impact was only temporary.

Following Cyclone Debbie, which hit Queensland in 2017, the 30+ day delinquency rate for home loans in affected areas and part of the rated residential mortgage-backed securities rose to 2.3 per cent, up from 2 per cent before the event. Eight months later the delinquency rate had dropped to 1.9 per cent.

Cyclone Debbie was one of the biggest natural disasters to strike Australia in the past 10 years, causing widespread damage to public infrastructure, businesses and private property.

Similarly in NSW, delinquencies also increased moderately after floods struck the state in September 2016. The 30+ day delinquency rate for home loans that were in disaster-hit areas and part of the mortgage pools of residential mortgage-backed securities increased to 2.4 per cent after the disaster, up from 1.7 per cent. Eight months later, they dropped to 1 per cent.

New South Wales has borne the brunt of significant natural disasters in Australia, accounting for 30.5 per cent of such events between 1970 and 2018. This is followed by Queensland, at 28.9 per cent, and Victoria, at 13.7 per cent.