Moody's: Australian residential mortgage arrears rise to 5-year high and will continue to increase

Moody's Investors Service says that the proportion of Australian residential mortgages more than 30 days in arrears rose to 1.62% in May 2017, the highest rate in five years, and up from 1.50% in May 2016.

"Furthermore, we expect delinquencies to continue to increase through the remainder of 2017, as weaker conditions in states reliant on the mining industry, high underemployment, and less favourable housing market and income dynamics will continue to drive the rate higher", says Alena Chen, a Moody's Vice President and Senior Analyst.

"The mining downturn has dampened economic growth in resource-reliant states, such as Western Australia, the Northern Territory and Queensland, and we expect this situation will weigh on mortgage performance for some time", adds Chen.

Moody's conclusions are contained in its just-released report on the Australian residential mortgage backed securities (RMBS) market, "RMBS - Australia: Mortgage delinquency map: Home loan arrears rise to five-year high".

Higher delinquencies raise the risk of mortgage defaults and are therefore credit negative for Australian RMBS.

Mortgage delinquencies increased to record highs in Western Australia, the Northern Territory and South Australia, and were also up in Queensland and the Australian Capital Territory over the year to May 2017. However, they declined in New South Wales and Victoria, and fell slightly from record high levels in Tasmania.

"Regions with exposure to the resource and mining sectors dominated the list of areas with the highest delinquencies in May 2017. Eight of the 10 regions with the highest 30+ delinquency rates were in either Western Australia or Queensland, and many of these regions are exposed to industries directly or indirectly related to mining and resources," says Chen.

The ten regions with the lowest mortgage delinquencies in Australia in May 2017 were all in Sydney and Melbourne, where housing market and economic conditions were the most supportive for mortgage borrowers.

The Western Australian economy is heavily reliant on the resources sector and growth has slowed over the past three years, following the end of the mining boom. Western Australia's final demand (a measure of domestic economic growth that excludes exports) fell sharply by 8% over the year to March 2017 owing to significant declines in business investment.

"With Australia's two core housing markets, we note that prices in Sydney and Melbourne rose 12.37% and 15.93% respectively over the year to July 2017, and 11.08% and 11.52% over the year to May 2017. Rising house prices have supported mortgage performance in these states, giving borrowers at risk of, or already in arrears, the option to sell their properties quickly for a good price to repay their loans," says Chen.

"However, as house prices continue rising without a corresponding increase in incomes to pay for the more expensive houses, housing affordability decreases and the risk of delinquencies and defaults rises," adds Chen.

Moody's further notes that Australia's financial regulators have introduced a range of measures to improve the quality of lending, curtail mortgage risk, and reduce overall household debt.

So, while aggregate house prices have continued to rise, other metrics like home sales and sales-to-new-listings ratios are softening, signaling a cooling in the housing market.

Persistently high underemployment will also constrain economic performance and wage growth, adversely affecting mortgage performance.

While Australia's unemployment rate was 5.60% in August 2017 and has remained below 6% since January 2016, its underemployment rate is much higher, averaging 8.57% Australia-wide in August 2017.

Underemployment results in lower income and reduced capacity to make mortgage repayments, increasing the risk of delinquencies and defaults.