Report highlights the factors contributing to these trends
New data from S&P Global Ratings (S&P) has highlighted an uptrend in arrears in the Australian residential mortgage-backed securities (RMBS) sector.
As of mid-2024, prime RMBS arrears stood at 0.95%, a slight decrease from 0.98% in the first quarter. This stability is attributed to several factors, including low unemployment, a moderate pace of refinancing, and resilient property prices. Despite this, the sector faces upward pressure on arrears due to anticipated increases in unemployment, which are expected to affect debt serviceability over time.
For nonconforming RMBS, arrears have risen significantly to 4.04% from 3.47% in the previous quarter. This increase reflects the sector’s heightened sensitivity to adverse economic conditions, according to S&P. Nonconforming borrowers, who typically have higher leverage and larger loan sizes, are more vulnerable to financial stress, exacerbated by inflationary pressures and limited refinancing options.
The differential performance between investor and owner-occupier arrears provides further insight. Investor arrears decreased to 0.79% in the second quarter, compared to 1.09% for owner-occupiers. Rising property values in states like Western Australia have supported this trend, enabling investors to manage financial pressures more effectively. Conversely, in New South Wales and Victoria, investor arrears are rising, influenced by greater leverage required to access property markets and higher property taxes.
In Western Australia and Queensland, investor arrears have declined due to strong property price growth, which has alleviated some financial strain on borrowers. In contrast, New South Wales and Victoria, where property prices have not kept pace with other regions, are seeing increased arrears. This divergence is partly due to the higher costs of property ownership and the more significant impact of property taxes on investor cash flow.
Real GDP growth is forecasted to weaken in 2024 due to lagging effects of monetary policy and global economic conditions, which is expected to dampen household spending and increase arrears. Unemployment is also projected to rise slightly, though it is expected to remain below pre-pandemic levels, potentially moderating the impact on arrears.
Inflation, while easing, continues to exert pressure on household budgets, particularly for non-discretionary expenses such as insurance and mortgage costs. This persistent inflation reduces real incomes, contributing to financial strain for lower-income households and potentially impacting their ability to meet mortgage obligations.
Prepayment rates offer another lens into borrower behaviour. For prime RMBS, prepayment rates increased to 20.99% in the second quarter, reflecting stable refinancing conditions. However, nonconforming borrowers are experiencing a decline in prepayment rates, constrained by higher leverage and fewer refinancing opportunities.
While the overall arrears landscape in the Australian RMBS sector remains relatively stable, underlying pressures from rising unemployment, inflation, and regional property price dynamics could lead to modest increases in arrears.
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