A credit ratings agency has predicted a spike in mortgage defaults will particularly hit Australians in the outer suburbs of the big cities when interest rates keep rising.
The Reserve Bank of Australia’s 0.25 percentage point increase last Tuesday – ending the era of the record-low 0.1 per cent cash rate – is far from the last, with new hints of a lot more pain for borrowers.
Two big banks – ANZ and Westpac – are expecting the RBA to raise rates seven more times by May 2023, which would take the cash rate to 2.25 per cent for the first time in eight years.
A 2.15 percentage point rise in a year would mark the fastest annual surge in the cash rate since 1994 – with maps showing the areas most at risk of mortgage delinquencies throughout the country.
The RBA on Friday suggested the cash rate could rise even higher to 2.5 per cent next year to keep a lid on surging inflation.
Headline inflation in the year to March surged by 5.1 per cent, the fastest pace since 2001, but the RBA has released new forecasts, predicting it will reach 6 per cent by the end of 2022 for the first time in two decades.
In little more than a year, inflation would have doubled as the global supply chain crisis really bites in Australia.
‘Sources of inflation are broadening. Firms are increasingly passing on cost increases as supply chain pressures have persisted and demand has remained strong,’ the RBA said in its statement on monetary policy, referencing inflation 193 times.
More Australians in outer suburbs will struggle to repay their home loan as interest rates rise – causing mortgage defaults and a plunge in house prices, a credit ratings agency fears (pictured are residents at Campbelltown in south-west Sydney)
Areas with the highest mortgage delinquency rates
* SYDNEY: Suburbs in the south-west including Liverpool (postcode 2170) and Cabramatta (postcode 2166); Blacktown (postcode 2148); the outer south-west covering Campbelltown (postcode 2560) and the Central Coast covering Gosford (postcode 2250)
* MELBOURNE: Suburbs in the north-west including Broadmeadows (postcode 3047)
* BRISBANE: Suburbs in Logan (postcode 4114)
* PERTH: Suburbs in the north-east like Red Hill (postcode 6056)
‘Inflation in Australia remains lower than in many other advanced economies, but it has picked up faster and to a higher level than previously expected.’
Even the underlying measure of inflation, taking out huge price increases like petrol, is on the high side, with the RBA expecting it to hit 4.75 per cent by the end of 2022 – a level well above the central bank’s 2 to 3 per cent target.
This is sure to mean even more pain for both borrowers and consumers.
Credit ratings agency Moody’s Investors Service said a series of rate rises would make it harder for many borrowers to repay their loans and cause a fall in real estate values.
‘The central bank’s rate rises will push up floating-rate mortgage interest rates, which will worsen borrowers’ capacity to repay debt and increase the risk of delinquencies and defaults,’ vice president Alena Chen said.
‘Interest rate rises will pose the most risk for mortgages with high balances and those where repayment amounts are close to borrowers’ maximum repayment capacity.’
Moody’s feared a fall in property prices would see struggling borrowers owe more than their property was worth, a situation known as negative equity where they can’t sell their home to repay their debt.
‘Interest rate rises will also weigh on house prices, which will add to risks of home loan delinquencies and defaults because of a weakening housing market will make it harder for borrowers in financial trouble to sell their properties at high enough prices to repay their debt,’ it said.
Sydney’s south-west was particularly vulnerable during previous interest rate rises, with the proportion of borrowers falling behind on their repayments increasing
Blacktown in western Sydney had a sharp increase in mortgage delinquencies when interest rates last rose
Last year, Australian property prices climbed by 22 per cent – the fastest annual pace since 1989.
The proportion of borrowers who are 30 days or more behind on their repayments has previously risen when interest rates have gone up and Moody’s is expecting that to happen again.
This would be particularly so in suburbs that already have higher mortgage delinquency rates, including pockets of south-west and western Sydney, northern Melbourne, Logan south of Brisbane and Perth’s north-east.
‘Mortgage delinquency rates in Australia, which decreased in most states and territories in 2021, will increase moderately over the rest of 2022 because of rising interest rates and slowing property prices,’ Moody’s said.
Within a year, Australians with an average mortgage of $600,000 could see their monthly repayments surge by $713 to $3,019 should the cash rate hit 2.25 per cent.
This would see variable mortgage rates rise from 2.29 per cent to 4.44 per cent.
Variable mortgage rates are set to rise to 2.54 per cent in coming weeks, following the rise in the RBA cash rate by a quarter of a percentage point to 0.35 per cent.
The RBA’s May rise was the first since November 2010.
But Moody’s Investors Service data from the Global Financial Crisis in 2008 showed home loan delinquencies rose in many outer-suburban areas that traditionally suffer from higher mortgage stress.
Sydney’s south-west – covering Liverpool (postcode 2170) and Cabramatta (postcode 2166) – was particularly vulnerable during previous interest rate rises, with the proportion of borrowers falling behind on their repayments increasing from 2.62 per cent in 2006 to 3.68 per cent in 2008 as the RBA cash rate increased from 5.5 per cent to 7.25 per cent.
Melbourne’s north-west had higher mortgage delinquencies during the last rate rises in 2008
Rate rises and inflation in 1994 versus 2022
1994: Reserve Bank cash rate rose by 2.75 percentage points from 4.75 per cent to 7.5 per cent between August and December
Annual inflation doubled from 2 per cent in September quarter of 1994 to 5.1 per cent by September quarter of 1995
2022: Westpac and ANZ are expecting the RBA cash rate to rise by 2.15 percentage points from a record-low of 0.1 per cent to 2.25 per cent
Inflation in March quarter was 5.1 per cent – fastest annual pace in 21 years – but the RBA is expecting it to hit 6 per cent by December for the first time in two decades
That would represent a doubling of inflation in little more than a year – with the consumer price index sitting at 3 per cent in the September quarter of 2021
Mortgage delinquencies stayed high at 3.13 per cent in 2011 after the RBA raised the cash rate in late 2010 to 4.75 per cent, following a series of rises starting in 2009 as inflation climbed again.
This region of Sydney had the city’s highest arrears rate of 1.87 per cent in November 2021, before the banks put up their fixed mortgage rates.
During that time, Blacktown (postcode 2148) in western Sydney saw its mortgage delinquency rate rise from 1.64 per cent in 2006 to 2.96 per cent in 2008, and hitting 3.09 per cent in 2011, after the 2010 RBA rate rise.
Its arrears rate of 1.24 per cent at the end of last year was among the highest in Sydney and more than double the delinquency level of the upmarket North Shore and Northern Beaches.
Blacktown’s median house price of $914,350 in April, based on CoreLogic data, is beyond the reach of an average income earner.
With a 20 per cent deposit, a typical full-time worker on $90,917 would have a debt-to-income ratio of eight.
The Australian Prudential Regulation Authority deems six to be the mortgage stress threshold.
In neighbouring Seven Hills, the median house price has risen above $1million.
Even before the rate rise, housing advocacy group Everybody’s Home and Digital Finance Analytics identified western and south-west Sydney as the worst areas for mortgage stress.
Mandurah south of Perth was particularly affected as the mining boom pushed up house prices
Melbourne also had pockets of mortgage stress, with delinquencies in the city’s north-west – taking in Broadmeadows (postcode 3047) – rising from 1.32 per cent in 2006 to 2.1 per cent in 2007 and 2.28 per cent by 2011.
Big Four banks update RBA rate forecasts
WESTPAC: 2.25 per cent cash rate by May 2023
NAB: 2.6 per cent cash rate by August 2024
ANZ: 2.25 per cent by May 2023
COMMONWEALTH BANK: 1.6 per cent by February 2023
The 1.65 per cent level late last year was Melbourne’s highest.
Mandurah (postcode 6210) south of Perth was particularly affected as the mining boom pushed up house prices with Moody’s data showing mortgage delinquencies rising from 0.3 per cent in 2006 to 1.91 per cent in 2008 and 4.11 per cent in 2011.
But its arrears rate of 1.58 per cent is now comparable with the rest of Perth.
Perth’s north-east covering Red Hill (postcode 6056) now has the city’s highest delinquency rate of 2.04 per cent.
Logan (postcode 4114) south of Brisbane also had a big jump in arrears, which doubled from 0.75 per cent to 1.5 per cent from 2006 to 2008, before hitting 2.66 per cent in 2011.
The 1.18 per cent rate in November 2021 was among the highest in south-east Queensland.
In 2021, the Coffs Harbour and Grafton region on the New South Wales Mid-North Coast had the lowest mortgage delinquency rate of 0.38 per cent while the Northern Territory Outback had the highest rate at 2.58 per cent.
The Reserve Bank of Australia is expecting an increase in the cash rate to two per cent to cause a 15 per cent fall in property prices.
But its arrears rate of 1.58 per cent is now comparable with the rest of Perth
How YOUR mortgage repayments could surge under a 2.25 per cent cash rate
$500,000: Monthly repayments rising by $594 from $1,922 to $2,516
$600,000: Monthly repayments rising by $713 from $2,306 to $3,019
$700,000: Monthly repayments rising by $831 from $2,691 to $3,522
$800,000: Monthly repayments rising by $951 from $3,075 to $4,026
$900,000: Monthly repayments rising by $1,070 from $3,459 to $4,529
$1,000,000: Monthly repayments rising by $1,189 from $3,843 to $5,032
Calculations based on variable mortgage rates rising from 2.29 to 4.44 per cent in line with the cash rate increasing by 2.15 percentage points from a record-low of 0.1 per cent to 2.25 per cent