This article is from the Australian Property Journal archive
MORTGAGE arrears rose in the December quarter to their highest level since the beginning of the COVID-19 pandemic, according to Fitch Ratings, and are set to increase further in 2024 on the back of the Reserve Bank’s interest rate hikes.
Fitch Ratings’ latest The Dinkum RMBS Index shows 30-plus day prime arrears rose by 10 basis points quarter-on-quarter to 1.21% in the December period, the highest reading since May of 2020.
“Historically, arrears increase in the fourth quarter, but this increase is larger than in prior years,” said Fitch Ratings director Tim Groombridge and senior director Natasha Vojvodic.
“Therefore, the rise most likely indicates that persistent inflation and the 4.25 percentage point increase in official interest rates since May 2022 are having an impact on some borrowers.
“The first quarter also usually sees a seasonal rise in delinquencies so Fitch Ratings expects arrears to continue to deteriorate in 1Q24.”
They said the cash-rate hikes would drive up arrears in 2024, “due to the high ratio of household debt/disposable income, reduction in household savings and the dominance of floating-rate loans in the Australian market”.
Savings ratios have fallen from 24% during the peak of COVID to just 1%.
Fitch expects interest rates to remain at this level for the majority of 2024. The Reserve Bank kept the cash rate on hold last week and changed its language to what some analysts described as “dovish”, but governor Michele Bullock retained a firm line that the board “can’t rule anything in or out” on future interest rate movements.
Early-stage arrears – 30 to 59 days – increased by six basis points over the quarter to the highest level since February 2016, while, 90-plus day arrears were up by three basis points to 0.56%. Fitch expects late-stage arrears to increase further in 2024, as borrowers face servicing pressure from high interest rates.
Fitch’s non-conforming RMBS index for 30-plus day arrears increased by 24 basis points in the quarter to 3.69%. The index remains well below the March 2009 quarter record high, when arrears climbed to 20.90%, or 5.7 times the current levels. The composition of non-conforming portfolios was significantly different in 2023 than in 2009, Groombridge and Vojvodic said. More recently, 30-plus day arrears averaged 6.0% in the five years prior to the pandemic.
The annualised loss rate, recorded by Fitch as a percentage of the current mortgage balance, rose marginally in the December quarter, from the lowest level since the global financial crisis, amid record property prices.
Groombridge and Vojvodic noted Australia’s home prices has risen by 1.3% over three months and 8.0% year-on-year, bringing prices to a new all-time high.
“Fitch expects prices to continue to rise in 2024 because of limited supply, a tight rental market and high net migration. However, home prices could fall if interest rates or unemployment increase above Fitch’s expectations,” they said.
“Price declines are unlikely to translate into losses for the majority of mortgages due to the strong price performance in recent years.”
While mortgage delinquencies have been rising, distressed listings continued to decline in February across all markets despite concerns of a fixed-rate mortgage cliff, according to Domain.
