Press release
All home loan borrowers now better off
Housing loan serviceability
- Rating agency FitchRatings has issued a report on mortgage delinquencies (www.fitchratings.com). A key finding of the report is that “all vintages (of loans) are currently better off from a serviceability point of view than they were when the borrower originally took out the loan.”
- The Australian 30+ day mortgage delinquency rate rose from 1.88 per cent to 2.13 per cent over the six months to September 2008. The rising in the delinquency rate reflects a period of rising interest rates.
- FitchRatings has rejected fears of significant housing stress in Australia saying that “Australian residential mortgages have, on average, performed well.”
- FitchRatings found that nine of the ten worst regions and nine of the ten worst postcodes for home loan arrears could be found in NSW. Unemployment will be the key variable determining future mortgage performance.
What does it all mean?
- It’s a stunning finding and one which quite a few will find hard to believe. But most home loan borrowers are better off now than when they first took out their loans. And it has been the Reserve Bank’s dramatic rate cuts over the past three months that have put home loan borrowers out in front.
- A survey of 840,000 mortgages conducted by FitchRatings has found that serviceability of all home loans taken out after 2002 is now better than when the borrowers first took out their loans. With interest rates expected to be slashed even further in coming months, the spending power of borrowers is set to get another substantial boost.
- FitchRatings found that missed payments on home loans in Australia remain low compared with other countries, but that delinquencies have risen over the past six months. While NSW – in particular Sydney – is the worst state by far for delinquencies, FitchRatings says that the worst performing regions in Sydney “appear to have peaked.”
- CommSec expects Australia’s cash rate to fall to a 35-year low of 4 per cent by February 2009. Just as NSW has been the biggest loser amongst states in the period of rising interest rates, it will clearly be the biggest winner as rates continue to tumble. A combination of lower loan servicing costs and cheaper petrol prices will lift spending power in NSW, finally giving residents a reason to smile.
- Businesses must be careful about making knee-jerk decisions in the current environment. If businesses engage in precautionary job cuts they could end up undoing a large portion of the benefits flowing from lower interest rates and petrol prices.
What do the figures show?
- FitchRatings has released a report entitled “Australian Mortgage Delinquency by Postcode — 30 September 2008.”
- The report is a study of 840,000 loans as at September 30 with a total outstanding balance of $140 billion.
- Over the year to September, the 30+ day mortgage delinquency rate rose from 1.56 per cent to 2.13 per cent. The 90+ day mortgage delinquency rate rose from 0.68 per cent to 0.97 per cent. FitchRatings found that “Australian home loan missed payments remain low by international standards.”
- While all states recorded a deterioration of mortgage delinquency, worst affected was NSW and Western Australia while there was only a marginal change in Victoria and NSW.
- FitchRatings expects some deterioration in mortgage delinquency in the short term, affected in part by seasonality. But the deterioration will be offset in part by improved serviceability.
- FitchRatings has found a “vast improvement in loan serviceability.” FirchRatings said: “The analysis also shows that, with wage growth, reductions in the rate of personal tax, and interest rate changes, all vintages are currently better off from a serviceability point of view than they were when the borrower originally took out the loan.”
- FitchRatings have rejected concerns of significant mortgage stress, saying that “Australian residential mortgages have, on average, performed well.”
- Interestingly, on the issue of delinquency, the study “reveals how the more expensive areas of the Lower North Shore and the Eastern Suburbs have consistently outperformed the more ‘affordable’ regions in western and south western Sydney.”
What is the importance of the economic data?
- FitchRatings has conducted a study of mortgage delinquencies by postcode to better assess issues such as affordability, loan serviceability and delinquency. An improvement in loan serviceability can translate to rising consumer confidence and spending.
What are the implications for interest rates and investors?
- The NSW economy has been a key drag on the performance of the national economy, a point borne out in rising mortgage delinquencies in the state. The good news is that massive rate cuts are starting to pay off. NSW-dependent companies, especially retailers and housing firms, have greatest potential to benefit from falling interest rates and petrol prices.
Source Craig James, Chief Equities Economist, CommSec
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