Mortgage Delinquencies to Rise Despite Improving Market

Ratings agency Moody's expects an increase in mortgage delinquencies in coming months despite the rebound in house prices.

High debt levels and the conversion of interest-only mortgages to principal and interest mortgages will continue drive up delinquencies, which ticked up slightly in the December quarter.

Residential property prices rose 2.4 per cent in the September quarter 2019 according to official figures released on Tuesday, the strongest quarterly growth since 2016.

Australia's record-high household debt, which amounts to 200 per cent of annual gross disposable income, could also contribute to a moderate rise in delinquencies.

“We expect house prices will continue to rise over the next year, which, along with low interest rates, will support mortgage performance,” Moody's said in a market briefing.

“However, we nevertheless expect delinquencies will rise moderately over 2020, given muted GDP growth of around 2.2 per cent and high household debt.”

Despite the recent uptick in house prices and low interest rates, mortgage delinquencies and defaults increased in most Australian states and territories over the year to May 2019.

Over the past four years, in virtually every state and territory, delinquencies have stepped up sequentially each year.

In NSW, the 30-plus days delinquency rate increased by 0.36 percentage points to 1.48 per cent over the year to May 2019, the highest level since April 2013, while in Melbourne the delinquency rate increased to 1.65 per cent in May 2019 from 1.36 per cent a year earlier.

In Queensland, the 30-plus days delinquency rate increased by 0.34 percentage points to 2.06 per cent over the year to May 2019. Delinquencies increased in all capital cities except Darwin.

On Moody's view, mortgage delinquencies will increase moderately, while defaults and losses will remain low, as long as there is continued GDP growth and low unemployment supporting borrowers' ability to meet their mortgage repayments.

In an attempt to reboot the housing market, the Reserve Bank decided to cut interest rates 25 basis points to the new 0.75 per cent low, marking the third interest rate cut this year.

A trend towards higher unemployment and a slowdown in jobs growth were the primary factors in the RBA’s decision to cut to the historic low.

Other supportive factors include the removal of the 7 per cent interest rate buffer for residential mortgage lending by the Australian Prudential Regulation Authority in July.