Australian RMBS delinquencies to rise as house prices fall: Moody's

Moody's Investors Service says that the 30-plus day delinquency rate for prime Australian residential mortgage-backed securities (RMBS) increased in the fourth quarter of 2018.

It tips they will likely continue to rise moderately amid declining house prices, high levels of debt, and the conversion of interest-only mortgages to principle and interest loans. 

The 30-plus day delinquency rate for prime RMBS increased to 1.58% in December 2018 from 1.49% in September 2018.  

The increase was driven in part by declining house prices, with house prices in Australia declining by 6.3% for the 12 months to February 2019, and by 10.4% and 9.1% in Sydney and Melbourne.  

Moody's expects prices will continue to decline moderately through 2019, while record-high household debt – at 191% of annual gross disposable income – will also contribute to a moderate increase in delinquencies.  

"Nevertheless, we expect the increase in mortgage delinquencies to be limited, while defaults and losses will remain low, as continued GDP growth and low unemployment will continue support borrowers' ability to meet mortgage repayments," says Alena Chen, a Moody's Vice President and Senior Analyst.  

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Specifically, Moody's forecasts real GDP growth of around 2.5% in both 2019 and 2020, and for Australia's unemployment rate to remain relatively stable at 5.5% over the same period.  

"Mortgage delinquencies will likely increase over the short term in areas hit by the far north Queensland floods in February 2019, as borrowers may lose income or face costs while dealing with the aftermath of the disaster," adds Chen.  

However, Moody's says this is unlikely to translate into a material increase in defaults, given that insurance payouts, government assistance and financial hardship arrangements entered into with lenders will ease the burden on borrowers.