Mortgage distress hits three-year high

Delinquency rates have hit a post-2005 record in WA and NT amid the resources downturn, says Moody’s.

Mortgage delinquencies will rise moderately for the remainder of 2016, Moody’s says.

The proportion of mortgages in distress has struck a three-year high and will likely keep rising for the remainder of the year, according to ratings agency Moody’s.

In its latest report on the local market, released this afternoon, Moody’s noted mortgage performance had deteriorated in all eight Australian states and territories over the year to May 31 2016.

The percentage of Australian residential mortgages more than 30 days in arrears (30+ delinquency rate) climbed from 1.34 per cent to 1.5 per cent.

A downturn in the resources sector was seen as a contributing factor, with 30+ delinquency rates in Western Australia and the Northern Territory advancing to a record peak since Moody’s began keeping records in 2005.

Tasmania also reached an unwanted record high, while South Australia was just 0.1 percentage point under its April 2013 peak.

“The increase in the 30+ delinquency rate across Australia raises the risk of mortgage defaults and is therefore credit negative for Australian residential mortgage-backed securities (RMBS),” Moody’s vice president and senior analyst Alena Chen said.

“Mortgage delinquencies will rise moderately for the remainder of 2016.

“Lower commodity prices and the associated slowdown in mining and mining-related sectors will continue to weigh on GDP growth and therefore mortgage performance.”

Sydney mortgage borrowers enjoy the most supportive housing market and economic conditions, ensuring the nation’s most populous city accounted for the majority of regions and postcodes with the lowest delinquencies, Moody’s said.

Expected slowdowns in the pace of house price growth as well as underemployment in WA are also seen weighing on the mortgage performance through until the end of 2016.

Beyond this year a number of issues threaten to continue to pressure arrears rates and potentially force banks’ bad debts higher, including a possible apartment glut and weak wages growth.

“The supply of newly-built apartments is set to increase significantly in some regions in Australia — particularly in some areas of Sydney and Melbourne — over the next two years. Such a situation will exert pressure on home prices and rental returns, and raise the risk of mortgage delinquencies and losses,” Ms Chen said.

“Furthermore, income growth in Australia has not kept pace with growth in home prices, posing an additional risk to mortgage performance.

“While home prices in Australia have risen 30.69 per cent over the three years to August 31, average weekly earnings have increased only 5.06 per cent.”

The expanding differential has forced households to take on more debt to fund their home ownership dream.

Despite the looming risks, Moody’s said the extent of the rise in mortgage delinquencies will moderate.