Flood of money, not the skies, to blame for home mortgage delinquency

Australia’s home loan delinquency rate now sits at an alarming high.

And the recent east coast natural disasters are nowhere near as much to blame as everyone’s been making out.

JPMorgan points the finger directly at home loans issued in 2009.

They were the home purchases made when interest rates fell to emergency lows to fight the global financial crisis.

They coincided with the first-home owners' grant being doubled and the $900 cash grant boosting consumer confidence levels.

The 2009 buyers were ripe for the borrowing, with Westpac and Commonwealth Bank then the keenest at lending into the robust first-home loan market.

JPMorgan says mortgages issued or refinanced in 2009 make up 20% of the current total arrears.

“We see clear potential for higher interest rates to drive arrears higher,” JP Morgan has ominously forecast.

“In particular, any further increase in interest rates would see the 2009 vintage loans exceed the affordability tests set at the time they were taken out.”

"First-home owners used the falling cash rate to increase the average amount borrowed by 25%,” the JP Morgan report's author, Scott Manning, says.

“First-home owners were not alone in expanding their gearing.”

Manning rightly reckons unemployment has traditionally been the key driver of mortgage delinquencies.

“But the gearing up of households over the last decade has seen them become a lot more vulnerable to increases in the mortgage rate.”

The Fitch report only measures the performance of Australia's so-called securitised loans rather than those funded by deposits from the big four banks, so it’s not therefore a true reflection of the entire home loans. Fitch’s analysis of 1 million mortgages over-represents those from the smaller banks and the non-bank lenders. As of March 2011, securitised mortgages represented 17% of all Australian mortgages by volume.

But it is concerning that Fitch concluded one in 400 borrowers had become delinquent since September 2010.

“As the Australian economy and unemployment are still solid, the increase in the mortgage rate and the increased cost of living remain the main variables affecting household affordability,” Fitch concludes.

In terms of mortgage performance, those regions historically labelled the “worst-performing” have been affected most by Christmas spending and increasing interest rates.

South-western Sydney and the Central Coast north of Sydney, the Gold Coast in Queensland and the south-west region in Western Australia are still experiencing delinquency rates far above the national average.

Fairfield-Liverpool continues to be the worst-performing region in Australia, with one mortgage out of 60 being in arrears and a 30+ day delinquency rate of 2.81%.

Regions in Queensland took four of the 10 worst-performing slots at end March 2011, up from just one back in September 2010, as the Gold Coast and Logan City experienced a considerable deterioration in delinquencies.

Overall performance in Western Australia has been stable, although 30+ delinquency rates were still high at 1.99% as of March 2011.

Looking on the bright side, Victoria has five of Australia’s 10 best-performing districts when it comes to mortgage delinquencies. They were Boroondara City, northern middle Melbourne, eastern middle Melbourne,  inner Melbourne and southern Melbourne.

Victoria’s overall delinquency rate stood at 1.34%, considerably lower than New South Wales (1.93%) and Queensland (2%).

Melbourne performed better than the rest of Victoria, with a delinquency ratio of 1.29%.

Despite having five of the nation's 10 worst-performing regions, Sydney also had two of the best. NSW”s lower northern Sydney district sits as the best-performing region in Australia, with just five mortgages out of 1,000 delinquent at the end of March 2011. Sydney’s eastern suburbs sat in fourth place, according to the Fitch Ratings survey, with just 0.65% of mortgage holders behind on payments.

Fitch analysed 80,000 mortgages in South Australia, with overall delinquencies below the national average at 1.54%, up only slightly from September 2010 (1.3%).

Tasmania had a 1.37% arrears rate.

The Northern Territory was the best-performing district in the country, with a delinquency ratio of 1.04% as arrears in the Australian Capital Territory increased to 1.09%.