While the majority of Aussies are able to settle their mortgage debts, signs of distress are beginning to emerge in parts of the country dependent on mining- and resource-based industries and services. This has prompted warnings from policymakers, ratings agencies, and the Organisation for Economic Co-operation and Development (OECD) about the housing market’s impact on the overall economy.
Mortgage stress is most keenly felt in Western Australia, where mortgage delinquencies top 2.1%, up by nearly half year-on-year, according to S&P Global. The credit ratings house said 30-day arrears on mortgages packaged in issued securities were at multi-year highs.
Alena Chen, senior analyst at Moody’s, said rising underemployment and weak wage growth would continue to drive mortgage delinquencies in mining-intensive states.
Signs of stress are also emerging in the mortgage insurance market. Last month, Genworth Mortgage Insurance (which provides protection to lenders from borrowers defaulting on their home loans) reported an 11% drop in profits due to a spike in mortgage delinquencies.
While signs of stress are apparent, it pays to examine the bigger picture. Australia’s arrears rate is under 1%, which is still modest compared with the peak of 27% seen in the US during the 2007-2009 subprime mortgage crisis. For now at least, rising arrears have not substantially impacted the wider property market or the financial system.
But worryingly, Australian households are among the world’s most indebted, with a debt-to-income ratio of 180%. In comparison, the debt-to-income ratio is only about 100% in Germany and 150% in the United States.
Australia’s mortgage debt now totals $1.7trn, which is equal to the country’s entire annual economic output. Earlier this month, the OECD warned that the rapid growth in Australia’s house prices could be a precursor to an economic downturn.
“There are signs that the housing market is cooling. Recent data indicate price growth has eased in most urban centres, reflecting in part a substantial supply response – dwelling approvals and investments have increased substantially in recent years,” the OECD said in a March economic report. “However, the significant increase in Australia’s house prices and price to income ratios remains. A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy.”
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