Australian mortgage delinquency rates will continue to increase over the next year due to the ongoing economic fallout from the COVID-19 outbreak, although arrears will vary by region depending on economic circumstances in each area.
Delinquencies have increased to its highest level in Victoria since 2005 and since 2013 in NSW, according to a new report by Moody’s Investors Service.
As of May 2020, Victoria and NSW saw delinquency rates at 1.85 per cent and 1.71 per cent, but were up 0.20 per cent and 0.23 per cent from May 2019 and at their highest level since 2005 and 2013, respectively.
During the same period, 30-plus days delinquency rates were the highest in Western Australia, at 3.33 per cent, although down 0.05 per cent from the previous year. For capital cities, mortgage delinquency rates also increased in Sydney, Melbourne, Brisbane, and Darwin.
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, Moody’s found.
“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,” Moody’s vice-president and senior credit officer Alena Chen said.
According to her, risks will be higher in Melbourne and Victorian regions because their extended lockdown to contain coronavirus cases will delay economic recovery compared to other regions.
Moving forward, Ms Chen expects economic conditions to remain uncertain, ultimately driving delinquencies higher.
The economic recovery will certainly be tenuous over the next year, with ongoing risks to GDP growth, high unemployment, soft housing market and the expiry of government and lender support measures being factors that will drive mortgage delinquency rates higher, according to her.
Moody’s has forecasted Australia’s GDP to grow by 4.3 per cent in 2021 after contracting by 5.3 per cent in 2020.
Meanwhile, unemployment rates are expected to remain elevated at around 7 per cent over the next year, particularly in regions with large exposures to sectors and industries most hit by coronavirus-related disruptions, such as tourism, hospitality and retail.
As of August, Australia’s unemployment rate was 6.8 per cent, while the underemployment rate was 11.2 per cent. Mortgage delinquency rates increased in 40 Australian regions over the year to May and fell in 47 regions.
The Australian housing market is also expected to remain soft over the next year.
According to Ms Chen: “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 per cent on average over the five months to September, led by a 2.9 per cent decline in Sydney and a 5.2 per cent decline in Melbourne. Prices rebounded in Brisbane, Perth and Adelaide in September, rising over the month after earlier falls.
Finally, coronavirus-related government income support measures and lender loan payment deferrals that have curbed mortgage delinquency rates in 2020 will end in 2021, ultimately 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.
If borrowers cannot resume repayment after payment deferral periods end, loans will become delinquent.
“The economic recovery will be 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,” Ms Chen concluded
“Performance in each region will also be closely tied to further outbreaks and measures able to effectively and quickly contain them.”