Moody’s issues blunt warning for residential property

Global ratings agency, Moody’s Investor Service, has fired a warning shot over the Australian mortgage market, suggesting “poor affordability increases the risk of delinquencies and defaults for new mortgages”.

The New York-based group says the risks are set to extend throughout the rest of the year – pinpointing mortgage holders in Sydney as the most exposed group in the country.

What’s more, Moody’s says the conditions will deteriorate further in the year ahead if inflation continues to remain untamed by the Reserve Bank of Australia. The report takes into consideration this week’s tenth rate rise that brought official rates up to 3.6 per cent.

The “credit negative” review has been issued for the local residential-backed securities market – a recent industry report estimated that around 7.4 per cent of Australia’s $1.8 trillion mortgage market is funded by mortgage-backed securities.

Many of the loans in this sector are linked with small business owners and “low-doc” lenders, which have lower hurdles than the majority of borrowers. Although in recent years the sector has also picked up considerable volumes of conventional “mum and dad” loans through mortgage brokers.

Reports from agencies such as Moody’s offer a rare window into the pressures in the wider mortgage market beyond the major banks. Key leaders in the so-called mortgage securitisation sector are groups such as Firstmac, Resimac, Pepper and LaTrobe.

But Moody’s stark warning of “we expect that housing affordability will remain poor over 2023”, signals trouble for all players in the residential market where official affordability figures published this week by the Real Estate Institute of Australia continued to worsen.

New research by the ratings agency found that on average in Australia two-income households now need to spend 31 per cent of their monthly income to meet mortgage payments – a figure that has lifted from 26 per cent in May 2022.

However, some sections of the market had exceptionally difficult conditions. In Sydney the figure for new borrowers moved up to 41 per cent.

In recent weeks the major bank results showed few signs of deterioration in credit quality. At CBA, the nation’s biggest bank, “troublesome and impaired assets” accounted for just 0.5 per cent of business loans.

Moreover, bank chiefs such as Shayne Elliot at ANZ said that the level of households behind in repayments – at below 1 per cent – was the “lowest they have ever been”.

Since the results were released, some senior bankers have started to warn the tempo in the market is waning. But Moody’s has come in with a direct warning that risks are clearly rising in home lending while falling house prices merely serve to neutralise the offsetting effect of higher rates

Moreover, the report makes the point that higher wages will not improve housing affordability because income growth will be low compared with the pace of interest rate rises and inflation levels.

Citing the prudential regulator’s recent decision to extend the pandemic period mortgage buffer rules – which mean banks assess home loan borrowers by adding 3 per cent to the actual rate offered – Moody’s says that although household incomes are increasing, higher rate settings will continue to “constrain the borrowing capacity of home buyers”.

With the latest rate rise now percolating through the banking system, the APRA buffer rules mean new home loan borrowers will be assessed at a rate of near 9 per cent.

KPMG partner Daniel Teper says: “One concern from a report like this may be that these non bank lenders had been quite competitive in the market, but now big banks are competing very hard and it will be interesting to see if the RMBS-backed sector can still compete effectively.”

Meanwhile, The Australian reported today that Moody’s rival, Standard and Poor’s, has been issuing downgrades in the commercial property sector, including Lendlease’s APPF Retail and Queensland-based QIC Property.