- Ratings agency S&P expects falling home prices will lead to “further pressures” in Australian mortgage arrears in the months ahead, albeit from low levels.
- More than 50% of total mortgage arrears in prime RMBS are overdue by more than 90 days, something S&P says is due to several factors, including “general mortgage stress”.
- It says labour market conditions will be a key factor in determining the outlook for arrears levels.
Falling home prices in Australia are expected to lead to “further pressure” in mortgage arrears in the months ahead, particularly among those borrowers with high loan-to-value ratios, says ratings agency Standard and Poor’s (S&P).
“We expect falling house prices to put further pressure on mortgage arrears in coming months,” S&P says.
“Borrowers with higher loan-to-value (LTV) ratios are more likely to be affected by softening property prices because they have not had time to build up equity or accumulate mortgage buffers.
“This could tip some borrowers into a negative equity position, which would significantly impede their refinancing prospects in the current lending environment.”
While S&P says that mortgage arrears are likely to lift in the period ahead, that expected increase needs to be put in context with overall arrears levels, at 1.36% in August as a proportion of prime loans underpinning residential mortgage-backed securities (RMBS), still sits at low levels compared to historic norms.
“Arrears are noticeably higher than the August average for the past five years of around 1.13%, though they remain low overall,” S&P said.
It said the vast bulk of mortgages past due in the latest report were for those more than 90 days in arrears.
“Loans more than 90 days past due reached 0.74% in August, making up around 54% of total arrears. This is up from 42% five years ago,” it said.
As for the reason behind the increase in this cohort compared to total arrears, S&P said geographic pressures, repayment shock for interest-only loans that have recently transitioned to principal-and-interest payments, and general mortgage stress, have been major factors.
It expects those trends will continue due to recent out-of-cycle rate rises announced by a large number of Australian banks, including three of the four majors.
As for risks on the outlook for arrears levels, S&P says labour market conditions, as they will for so many other facets of the Australian economy, will be key.
“Continued jobs growth and stable employment conditions are fundamental in enabling the majority of borrowers in Australian RMBS portfolios to meet their mortgage repayments,” it says.
According to the Australian Bureau of Statistics (ABS), Australia’s unemployment rate fell to 5% in September, the lowest level in over six years. From 12 months earlier, full-time employment surged by 217,500, nearly four times higher than a 63,400 increase in part-time employment over the same period.
Continued strength in the labour market has helped to offset the impact of a downturn in the housing market with CoreLogic reporting a nationwide decline in the year to September of 2.7% in average weighted terms.
The largest declines over that period were recorded in Sydney and Melbourne, along with the mining capitals of Perth and Darwin, ranging from between 2.8% to 6.1%.
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