High debt and higher rates to trigger arrears rise: Moody’s

According to Moody’s Investors Service’s latest RMBS Australia report, arrears over 30 days underlying Australia’s prime residential mortgage-backed securities (RMBS) remained stable month-on-month at 1.5 per cent in June 2018, and has dropped year-on-year from 1.6 per cent in June 2017.

Further, arrears over 30 days for non-conforming RMBS were 3.16 per cent in June 2018, compared with 3.05 per cent in March 2018 and 3.41 per cent in June 2017.

However, Moody’s expects arrears to rise “moderately” in the coming quarters, citing high levels of household debt and rising interest rates.

“We expect delinquencies to increase moderately, given Australia’s record high household debt, which amounts to 190 per cent of annual gross disposable income,” Moody’s said.

“High debt increases the risk of delinquencies, especially in a rising interest rate environment.”

The ratings agency made reference to recent out-of-cycle interest rate hikes form lenders, including three of the big four banks.

Despite acknowledging that rising interest rates would place pressure on borrowers, Moody’s claimed that such risks would be offset by strength in other economic indicators.

“We do not expect this round of rate rises to result in a significant increase in mortgage delinquencies, given that labour market conditions remain favourable and the rate increases were small compared with buffers built into home loan serviceability assessments,” Moody’s added.

In light of research which found that 13 per cent of investors would “struggle” to repay principal and interest once their interest-only term expires, Moody’s said: “A large number of interest-only mortgages are due to convert to principal and interest loans over the next two years, which will contribute to an increase in delinquencies over this period.”

However, Moody’s concluded that strong labour market conditions and stable GDP growth would continue to support credit quality.

“On the positive side, economic and labour market conditions in Australia will continue to support borrowers’ ability to meet mortgage repayments over the next year, meaning that the increase in delinquencies will be moderate.

“We forecast real GDP growth of around 2.9 per cent for calendar 2018 and 3 per cent for 2019. Australia’s unemployment rate was 5.4 per cent in June and we expect it will remain relatively stable at 5.6 per cent by the end of 2018 and 5.5 per cent at the end of 2019.”

[Related: Arrears 21 bps higher year-on-year]