High debt and economy stoke rising mortgage stress

Australia’s record-high levels of household debt will continue to contribute to a moderate increase in delinquencies over 2019.

Worsening economic conditions will also play a part in Australia’s housing market. Picture: Supplied.

Mortgage delinquency rates in Australia are likely to increase moderately through 2019 because of record-high debt, weakening macroeconomic conditions and conversion of interest-only loans to principal and interest loans, ratings agency Moody’s says.

The 30-day-plus delinquency rate for prime Australian residential mortgage-backed securities increased by 10 basis points for the quarter through June, reaching 1.67 per cent.

That figure is expected to continue to rise moderately for the remainder of the year, while defaults and losses will remain low, given recent interest rate cuts, Moody’s Investors Service says.

“Australia’s record-high levels of household debt – at almost 200 per cent of annual gross disposable income – will continue to contribute to a moderate increase in delinquencies over 2019,” said Moody’s vice president and senior analyst Alena Chen.

“Worsening economic conditions will also play a part.

“In August, we lowered our real GDP growth forecast for Australia to 2.3 per cent from 2.5 per cent for 2019, while the unemployment rate increased to 5.3 per cent in August from 5.2 per cent in July.”

While the conversion of interest-only mortgages to principal and interest loans was expected to contribute to delinquency figures, the risk was diminishing, with most interest-only mortgages originated in 2014 and 2015 – when large volumes were originated – already converted, Moody’s said.

The removal of a minimum 7 per cent interest rate floor by the prudential regulator in July would help support borrowers, while recent housing market improvements, particularly in Sydney and Melbourne, would also be positive for mortgage performance, if sustained, the analysts said.

The latest housing price data released by CoreLogic today found that house prices continued to trend upwards in September, as the market continued to turn on the back of two interest rate cuts in June and July.

The comments by Moody’s came ahead of the RBA’s rate announcement on Tuesday afternoon when the central bank cut the official cash rate by 25 basis points to a new record low of 0.75 per cent, in a move that had been widely expected.