, Australia

Mortgage delinquencies in Australia to continue to rise through 2021: Moody's

Mortgage delinquency rates had already increased to the highest levels since 2005 in Victoria and since 2013 in NSW.

According to a recent report by Moody’s, mortgage delinquencies will continue to increase over the next year Australian mortgage delinquency rates, which have increased since the coronavirus outbreak, will continue to increase over the next year, because of the ongoing economic fallout from the pandemic.

“Mortgage delinquency rates had already increased to the highest since 2005 in Victoria and the highest since 2013 in NSW by May, and were also up in the Northern Territory. For capital cities, mortgage delinquency rates had increased in Sydney, Melbourne, Brisbane, Perth and Darwin.”

Here’s more from Moody’s:

Mortgage delinquency rates had not worsened on average in other states, territories and capital cities, but the economic environment has been negative for mortgage performance since then, though government support measures and lender loan payment deferrals mitigated some risks.

We expect mortgage delinquency rates will increase on average in Australia over the next year given the ongoing economic fallout from the coronavirus. Delinquency rates will vary across states, cities and regions, depending on economic circumstances in each area, which will be closely tied to virus outbreaks and measures to contain them.

Risks will be higher in Melbourne and Victorian regions because their extended lock-down to contain coronavirus cases will delay economic recovery compared to other regions. Rising mortgage delinquencies are credit negative for Australian RMBS.

Economic conditions will remain uncertain, driving delinquencies higher

We expect the economic environment will remain uncertain over the next year, with ongoing risks to GDP growth, high unemployment, soft housing market and the expiry of government and lender support measures. These factors will drive mortgage delinquency rates higher.

Economic recovery will be tenuous
We forecast Australia's GDP will grow 4.3% in 2021 after contracting 5.3% in 2020. However, the economic recovery will be tenuous and subject to risks from further coronavirus outbreaks and restrictions, until an effective vaccine is widely available. The economic environment in each state and therefore mortgage delinquency rates will be tied to each state's success in containing the virus.

Unemployment will remain high

We forecast that Australia's unemployment rate will remain elevated at around 7% over the next year. Unemployment rates will be higher in sectors and industries most exposed to coronavirus-related disruptions, such as tourism, hospitality and retail.

Unemployment and underemployment reduce household incomes and constrain borrowers' abilities to make mortgage repayments. As of August, Australia's unemployment rate was 6.8%, while the underemployment rate was 11.2%.

Housing market will remain soft

The Australian housing market will remain soft over the next year, which will contribute to mortgage delinquencies. Apartment prices are more at risk than house prices given the lower demand for units in the current uncertain economic environment.

Prices in areas with a high concentration of coronavirus-exposed industries will also be at risk. Australian house prices declined 2.8% on average over the five months to September, led by a 2.9% decline in Sydney and a 5.2% decline in Melbourne. Prices rebounded in Brisbane, Perth and Adelaide in September, rising over the month after earlier falls.

Support measures will end

Coronavirus-related government income support measures and lender loan payment deferrals have curbed mortgage delinquency rates in 2020. However, these relief measures will end in 2021, contributing to mortgage delinquencies.

Household incomes will come under pressure when the government's Jobkeeper and Jobseeker programs end next year. Lower incomes will constrain borrowers' abilities to make mortgage repayments.

As of August, 5%-10% of loans in prime RMBS portfolios were on coronavirus-related loan payment deferrals. For non-conforming RMBS portfolios, 10%-20% of loans were on payment deferrals. Payment deferral periods will end in 2021. If borrowers cannot resume repayment after payment deferral periods end, loans will become delinquent.

Regions with large exposures to coronavirus-hit industries pose high risk

Mortgage delinquency rates increased in 40 Australian regions over the year to May and fell in 47 regions. Over the next year, mortgage delinquency risks will be high in regions with high economic and labour market dependence on industries such as tourism, hospitality and retail, which have been hit hard by coronavirus disruptions. Performance in each region will also be closely tied to further outbreaks and measures able to effectively and quickly contain them.

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