Mortgage delinquency rates set to rise next year, warns Moody’s

Credit rating agency Moody’s warns that falling house prices would increase the risk of home loan delinquencies and defaults, as borrowers face higher rates.

Australian mortgage delinquency rates are set to rise over the next year due to interest rate increases, cost-of-living strains and falling property prices, warns credit rating agency Moody’s.

Moody’s said that falling house prices would increase the risk of home loan delinquencies and defaults because of a weakening housing market, making it harder for borrowers in financial trouble to sell their properties at a high enough price to repay their debt.

However, delinquency rates fell in most states and territories, except the NT, over the year to May and the proportion of Australian residential mortgages that were more than 30 days in arrears decreased to 1.2 per cent in May this year from 1.61 per cent in May 2021.

But the pressure is rising as in the September quarter, house prices declined 6.1 per cent in Sydney, 3.7 per cent in Melbourne and 4.1 per cent on average across Australia.

Leading global economics forecaster Oxford Economics is predicting the Reserve Bank will hike the cash rate to 3.1 per cent by year-end, which would push the average new mortgage rate close to 6 per cent and cause a 25 to 30 per cent deterioration in borrowing power for home buyers compared to the September quarter last year.

Their baseline expectation for a nationwide all-dwelling peak-to-trough fall is now 11.5 per cent, up from 7 per cent previously.

Moody’s has warned falling house prices would increase the risk of home loan delinquencies and defaults, as borrowers face higher rates. Picture: Kelly Barnes/NCA NewsWire

Sydney is expected to be hit the worst, with house prices forecast to fall 18 per cent, while Perth homes would be spared, and as the forecaster predicted they would experience a modest drop of 4 per cent.

National house and unit prices are expected to drop 13 per cent and 8 per cent, respectively.

However, in Oxford Economics’ recent Australian residential property report, the team suggests there are a number of positive fundamentals in play that they expect will prevent a deeper decline.

On the demand side, there is the very tight stock balance of residential property going into the downturn and sustained pressure that will arise from the recovery of overseas migration while on the supply side, a continued strong labour market would keep the level of forced or pressured sales relatively low.

Oxford Economics senior economist Maree Kilroy said because there was a high participation rate and the unemployment rate, households were unlikely to be pressured to sell their home if they experienced job losses.

“They’ll likely just sit on their hands and it will lead to reduction in actual turnover, rather than them having to accept a lower price which would put downward pressure on prices,” she said.

Once the cash rate potentially reaches around 3.1 per cent by year-end, the economic forecaster is predicting it will hold and then start falling back to a neutral rate at around 2.6 per cent by 2023 into 2024.

Ms Kilroy said that should provide the reprieve households were after, also with interest rates falling and real wages lifting into 2024.

“So that should improve housing affordability, which should be the driver for a return to growth,” she said.

Australia should dodge the worst of the global housing crisis while other countries are much closer to the brink of collapse, Oxford Economics says.

Canada, New Zealand, and Sweden are the countries most at risk of a housing crash, predicts Oxford Economics, with estimated peak price falls of around 30 per cent, 20 per cent and 15 per cent, respectively. The US and Britain were also deemed to be in dangerous territory.

But Australia is not in such a parlous state.

The economic forecaster said while interest rates are a significant factor in how housing markets sway, labour market conditions are often the deciding factor.

Forced house sales rise when employment falls, which causes house prices to fall markedly. If labour markets could remain strong, history shows the chances of a less severe correction is higher.

Oxford Economics data showed that if employment and pay growth fell by 1 percentage point, this would increase the probability of a crash by 20 per cent and 15 per cent respectively, or 35 per cent cumulatively.

With more redundancies comes an influx of forced sellers in the housing market and significant falls in house prices, the Oxford Economics team said.

However, pay growth could be an important factor in preventing a “hard” landing.

If wages were to rise quickly, house prices would have space to slow, rather than drop, to improve affordability and invite demand back into the market, which is especially important to markets such as the US where the risk of a major correction is high.