Mortgage delinquencies are expected to increase in the coming quarters amid a slew of interest-only mortgages set to switch to principal-and-interest loans, the nation’s declining house prices and high debt levels.
Australia’s debt levels are at record highs reveals Moody’s Investors Service, at almost 200 per cent of annual gross disposable income.
Moody’s vice president Alena Chen expects this will contribute to the “moderate increase” in mortgage delinquencies.
A number of interest-only mortgages are due to convert to principal and interest loans by the end of 2020, which Moody's anticipates will cause delinquencies over this period as borrowers are burdened with higher monthly repayments.
Chen said banks originated a large volume of interest-only loans in 2014 and 2015, with the five year interest-only period for these mortgages ending this year and 2020.
And while recent Corelogic data shows a slowdown in the rate of falling house prices led by Sydney and Melbourne for the month of May, Moody’s factored in the nation’s falling dwelling values as contributing to the moderate rise in mortgage delinquencies in the coming quarters.
While the 30-plus day delinquency rate for prime Australian residential mortgage-backed securities (RMBS) increased slightly to 1.58 per cent in March this year, from 1.54 per cent in December 2018, Moody's affirms the increase in delinquencies over the coming quarters will be moderate.
House prices in Australia declined by an average of 7.3 per cent in the 12 months to May this year. In Sydney and Melbourne, prices declined by an average of 10.7 per cent and 9.9 per cent respectively.
But with the slower rate in price decline for dwellings, Moodys also said it has moderate expectations for the property market this year.
“We expect prices to continue to decline moderately over the remainder of 2019” Chen said.
Given the nation’s stable GDP growth, and low unemployment, Moody’s expects defaults and losses will “remain low”. While the ratings agency says it expects the rise in delinquencies “to be moderate”.
Following the reserve bank's recent record rate cut to an all-time low of 1.25 per cent, prompting most lenders to lower their variable mortgage interest rates, Moody's expects this to better support borrowers in meeting mortgage repayments.
“We forecast real GDP growth of around 2.5 per cent in both 2019 and 2020,” Chen said.
“Australia's unemployment rate was 5.2 per cent in April 2019 and we expect it will remain relatively stable at 5.5 per cent by the end of 2019 and 2020.”