Australian home loan arrears are low but rising, and Moody's expects that trend will continue

Julie Dermansky/Corbis via Getty Images
  • The proportion of Australians falling behind on their home loan repayments rose across most parts of the country last year.
  • Arrears in New South Wales hit the highest level in five years, although they still remained below most other areas. Home prices in Sydney fell the fastest of any capital city last year.
  • Regional areas continue to have higher levels of delinquencies than capital city markets, especially in mining regions.
  • Moody’s Investors Service expects arrears will continue to increase this year, but remain low by historical standards.

The proportion of Australians falling behind on their home loan repayments rose in the year to November, reflecting the impact of falling home prices in many parts of the country along with many borrowers being forced to switch from interest

According to analysis from Moody’s Investors Service, the percentage of borrowers more than 30 days behind on their repayments rose to 1.58%, up 0.13 percentage points from the level recorded in November 2017.

The increase was widespread across the country, with the exception of Queensland.

“Mortgage delinquencies increased in New South Wales, Victoria, Western Australia, Tasmania, South Australia, Australian Capital Territory and Northern Territory over the year to November 2018, but declined in Queensland,” said Alena Chen, Vice President at Moody’s.

“Delinquency rates were lower in capital cities than other regions of most states or territories, reflecting the higher levels of economic diversity and employment stability in metropolitan areas.”

Of note, Moody’s said that arrears in New South Wales increased to the highest level in five years, led by an increase of 0.24 percentage points in Sydney where median home prices fell the most last year, according to data from Corelogic. This market was also previously favoured by interest-only borrowers, including housing investors, meaning curbs introduced by APRA to move some borrowers to amortising repayments impacted this market more than others.

Despite the lift in arrears over the year in Sydney, Chen said they remained very low compared with the rest of Australia, as seen in the map below showing 30-day plus delinquencies across Australia.

Moody’s Investors Service

In regional areas, Chen said locations exposed to the mining sector dominated the list of areas with the highest delinquencies, largely reflecting the impact of previous falls in commodity prices and the unwind of Australia’s mining infrastructure boom, leading to weaker economic conditions in those locations.

Chen expects the recent uplift in arrears across the country will continue this year, although it still expects overall levels to remain low compared to periods in the past.

“Delinquencies will continue to increase over 2019, because of high debt levels, subdued wage growth, the conversion of interest-only mortgages to principal-and-interest loans and declining house prices,” she said.

“However, delinquencies will remain low overall, given the rate of economic growth and low unemployment.”

Australia’s unemployment rate fell to 4.9% in February, the lowest level in eight years. Wage growth, while still very low, is also starting to lift, especially among private sector workers.

Income tax relief announced in Australia’s federal budget will, along with solid labour market conditions, help to boost household income levels, potentially helping to offset the effects of expected further declines in home prices and a higher proportion of borrowers making amortising mortgage repayments.

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