New loans vulnerable to market shocks

by Miklos Bolza14 Sep 2017
High household debt and low wage growth continue to compound mortgage risks in the Australian market, warned Moody’s Investors Services.

The agency’s new report, RMBS – Australia: Delinquencies rising, issuance strong, shows that despite stable market conditions and a predicted real GDP growth of 2.7% in 2018, loans underpinning residential mortgage-backed securities (RMBS) are at risk.

“Mortgage loans originated in the past 12 months at the peak of the recent house price cycle and at worsening affordability levels will suffer the greatest losses in the event of a negative shock or interest rate increases,” said Moody’s associate managing director Ilya Serov.

“More seasoned mortgage loans and RMBS backed by such loans will be better placed to weather economic shocks. Seasoned mortgage loans have benefited from improved affordability as a result of decreasing interest rates in recent years. Such mortgages have also built up significant equity buffers as a result of house prices gains.”

With household debt reaching record highs of 190% of annual gross disposable income in Q1 2017 and annual wage growth dropping to 1.9% in May 2017, housing affordability has deteriorated. This has increased risks for less seasoned mortgages as well as any RMBS backed by these loans.

Throughout the first half of 2017, $16.6bn of Australian RMBS was issued across 21 transactions. This represents an upward trend compared with the $24.5bn worth of RMBS issued in the entirety of 2016.

Although levels of 30+ day delinquencies for Australian prime RMBS remain low, the total percentage has increased from 1.50% on 31 March 2017 to 1.67% on 30 June 2017. Loans more than 90 days in arrears accounted for the majority of this growth.

“We expect that Australian RMBS delinquencies will continue to increase over the course of 2017. Weaker economic conditions in states reliant on the mining industry, rising underemployment, weak wage growth and less favourable housing market conditions will drive delinquencies higher,” Serov said.

For non-conforming RMBS, the 30+ day delinquency rate also rose from 4.1% on 31 March 2017 to 4.5% on 30 June 2017.

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