As high interest rates and inflation erode household savings, Australian residential mortgage delinquency rates will continue to rise, according to a new report.
The latest data for residential mortgage-backed securities (RMBS) by Moody’s Investors Service revealed that the share of prime quality home loans that were at least 30 days in arrears (30-plus days delinquency rate) was 1.38 per cent in June 2023, up from 1.25 per cent in March.
The 30-plus day delinquency rate for Australian RMBS rose from 1.45 per cent in March to 1.65 per cent in June at the major banks, from 0.78 per cent in March to 1.71 per cent in June at non-banks, and from 0.34 per cent to 0.58 per cent at other authorised deposit-taking institutions (ADI).
The delinquency rate for non-conforming mortgages (loans to borrowers with adverse credit histories or where lenders use truncated means to verify incomes) increased from 3.84 per cent in March to 3.98 per cent in June.
The Moody’s Investors Service data also showed that delinquency rates remained below the peak of 1.76 per cent for prime mortgages and 4.80 per cent for non-conforming home loans during the COVID-19 pandemic.
Alena Chen, vice president at Moody’s Investors Service, said the ratings agency expects delinquency rates to continue to rise over the rest of 2023.
She said the combination of high interest rates and inflation has materially reduced Australia’s household savings ratio to the lowest level since 2008 of 3.20 per cent, which is weakening the ability of financially vulnerable borrowers to meet mortgage repayments.
Ms Chen noted: “Inflation, while easing from recent peaks, remains well above the RBA’s target range at 5.2 per cent, which means borrowers have to contend with elevated consumer prices and that high interest rates will likely persist for some time.”
Indeed, Reserve Bank of Australia (RBA) governor Michele Bullock did not rule out rate rises in her monetary policy decision statement released on 3 October, stating that it may be required to ensure that inflation (currently at 6.50 per cent) returns to target in a reasonable time frame.
She added, however, that will continue to depend on the data and the evolving assessment of risks.
Nevertheless, she said the expectation is for mortgage delinquencies to rise only modestly because Australia’s low unemployment rate and recovering house prices would mitigate risks for borrowers.
“Additionally, lenders have substantially cut back on risky mortgage lending over recent years, which will further mitigate risks,” Ms Chen remarked.
While the RBA has paused its cycle of interest rate rises, she said, the rate hikes between May 2022 and June 2023 to 4.10 per cent have significantly increased mortgage repayment costs.
Moody’s Investors Service report also noted that the fixed rate period for many mortgages is set to end towards the end of 2023, which means many home owners will transition to variable rates that are significantly higher than their fixed rates.
Therefore, this could increase the risk of mortgage stress, it said.
“However, a large share of the outstanding RMBS we rate are by non-bank lenders, which typically have a higher proportion of variable-rate mortgages than banks. Consequently, the share of fixed-rate mortgages in the pool of loans backing outstanding RMBS we rate is lower than the mortgage sector overall,” Ms Chen stated.
According to the RBA’s Financial Stability Review for October 2023, around 10 per cent of fixed-rate borrowers who have rolled off their fixed rates since May 2022 are facing an increase in their payments of more than 60 per cent.
By comparison, around 14 per cent of current fixed-rate borrowers are expected to face an increase in mortgage payments of more than 60 per cent when they roll off, based on variable rates as at July 2023.
“This in part reflects that a larger share of these loans were originated (or refinanced) at very low interest rates during the COVID-19 pandemic compared with fixed-rate loans that have already rolled off,” the report said.
Nonetheless, the review said that the vast majority of fixed-rate borrowers have sufficient income to service these higher loan payments and meet their essential expenses.
Consumers nervous of more rate rises
Meanwhile, data from Westpac revealed that consumers remain wary of the potential for more rate rises in the months ahead.
A total of 1,200 adults aged over 18 were surveyed between 2 and 5 October 2023 for the Westpac-Melbourne Institute Consumer Sentiment after the RBA’s decision to pause rates in October.
Among those surveyed, 63 per cent of respondents said they still expect mortgage interest rates to rise over the next year, up sharply from 52.3 per cent in September. However, this is considerably lower than the 70–80 per cent reads seen when the RBA was actively raising rates, the report said.
On housing, senior economist at Westpac Group Matthew Hassan said the major bank continues to see a mix of very weak consumer assessments of “time to buy” and very bullish expectations of prices.
While the “time to buy a dwelling” index posted a 4.8 per cent rise in October, it remains at extremely low levels by historical standards at 76, Mr Hassan said.
The Westpac-Melbourne Institute House Price Expectations Index rose a further 3.8 per cent to 160.4, hitting yet another new cycle high. Just under 70 per cent of consumers now expect prices to rise over the next 12 months.
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