Risks will extend through the rest of the year, ratings agency warns
Global ratings agency Moody’s Investor Service has warned that poor affordability in the Australian mortgage market will increase the risk of delinquencies and defaults for new mortgages.
Moody’s said the risks will extend through the rest of 2023, highlighting mortgage holders in Sydney as the most exposed, The Australian reported.
The ratings agency also warned that conditions will continue to worsen in the year ahead if the Reserve Bank can’t curb inflation.
The Moody’s report accounts for this week’s rate rise – the 10th in a row – which brought the official cash rate to 3.6%.
The “credit negative” review was issued for the Australian residential mortgage-backed securities market. About 7.4% of Australia’s $1.8 trillion mortgage market is funded by mortgage-backed securities, according to The Australian.
Many of the loans in this space are linked to small business owners and “low-doc” lenders, who face lower obstacles than most borrowers. However, in recent years the sector has also seen a considerable volume of conventional loans through mortgage brokers.
Trouble for all players
Moody’s warning that it expects housing affordability to remain poor throughout the year indicates trouble for all players in the residential mortgage market, The Australian reported. According to a report published this week by the Real Estate Institute of Australia, affordability is continuing to worsen.
New research by Moody’s found that two-income households in Australia now need to spend an average of 31% of their income to meet mortgage repayments. That’s up from 26% in May 2022.
Conditions are even more difficult in some markets. In Sydney, new borrowers need to spend an average of 41% of their income on mortgage repayments, The Australian reported.
So far, the major banks have seen few signs of deteriorating credit quality. At Commonwealth Bank, “troublesome and impaired assets” accounted for only 0.5% of business loans. Bank bosses such as ANZ’s Shayne Elliott said the share of households behind in repayments – less than 1% – was “the lowest they have ever seen.”
Slowing tempo
Some senior bank officials have recently warned that the tempo in the market is slowing, however – and Moody’s has given a direct warning that danger is rising in home lending, The Australian reported.
While home prices are falling, that effect is mitigated by rising interest rates. Moody’s also warned that higher wages won’t improve housing affordability because income growth will be low compared to inflation and the pace of interest rate hikes.
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Citing the Australian Prudential Regulation Authority’s recent decision to extend pandemic mortgage buffer rules, Moody’s said that while household incomes are increasing, higher rates will continue to “constrain the borrowing capacity of home buyers.”
With this week’s rate hike now working its way through the system, the APRA buffer rule means that new home loan borrowers will be assessed at a rate of nearly 9%, The Australian reported.
“One concern from a report like this may be that these non-bank lenders have been quite competitive in the market, but now big banks are competing very hard and it will be interesting to see if the RMBS-backed sector can still compete effectively,” KPMG partner Daniel Teper told the publication.
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