| 10.10,18. 01:35 PM |
Home loan defaults more likely to jump in outer suburbs, warns Moody's
Photo: Moody's says lower incomes make delinquency rates higher in the outer suburbs. (Audience submitted: Edwin Almeida
Australian households in the outer suburbs are at greater risk of defaulting on their home loans due to their lower incomes and higher debts, according to Moody's.
The ratings agency analysed residential mortgage-backed securities to find out which households were behind on their repayments.
Moody's found the proportion of borrowers that were at least 30 days behind on their home loans averages 1.1 per cent within 5 kilometres of city centres, but jumps to 1.9 per cent in suburbs between 30-40 kilometres away.
Moody's noted a number of factors behind the discrepancy.
"Average incomes are lower in outer suburbs than in inner-city areas, while mortgage loan-to-value (LTV) ratios are higher on average in outer areas and socioeconomic conditions are typically weaker," the report observed.
"These factors increase the likelihood of mortgage delinquencies and defaults in outer areas, particularly in the event of an economic downturn."
Despite the fact that real estate is generally a lot cheaper further away from city centres, the lower average incomes mean most households pay down their loans more slowly, leaving them at higher risk of falling into negative equity if property prices drop substantially.
"People on lower incomes have less capacity to make mortgage repayments above the scheduled minimum payments, which means loan amounts are paid down slower and LTVs remain higher," Moody's noted.
"Higher LTVs increase the risk of default and mean there is less equity in properties to absorb losses if defaults occur."
People with positive equity in their property are able to sell it if they start having difficulty meeting their repayments, while still being able to pay off their debt, while those in negative equity may be pushed into default.
Non-bank lenders also appear to do more business in these areas, Moody's observed, perhaps due to the risky nature of the borrowers involved given lower and often less stable incomes and higher loan-to-value ratios.
Inner-city investors also a risk
While Sydney exemplifies this geographical trend almost perfectly, with arrears rates rising steadily with distance from the CBD, the other major cities have slightly higher rates of delinquency in the CBD than they do 5-10 kilometres from it.
Moody's said that was mainly due to delinquent investment loans in those inner-city areas, with 57 per cent of mortgages in arrears within 5 kilometres of the Melbourne CBD held by property investors.
The ratings agency warned that could make inner-city areas vulnerable to a steep rise in defaults during a severe property downturn.
"In suburbs within 5 kilometres of the CBD in Sydney, Melbourne and Brisbane, at least 50 per cent of mortgages are extended for investment purposes," Moody's observed.
"There is also a high share of interest-only loans in these areas.
"The performance of investment and interest-only loans is more sensitive to housing price declines than owner-occupier and principal and interest loans, because borrowers rely on price gains to earn a return on their investment.
"Falling housing prices can also hamper borrowers' ability to refinance such loans or extend interest-only terms."
However, while inner-city areas may see a rise in mortgage arrears and defaults due to the high proportion of investors, Moody's expects the outer suburbs will still be worst hit in a property crash.
"In the event of a prolonged downturn in house prices, mortgage delinquencies and defaults could increase in inner-city areas with a high share of investment and interest-only loans, though in general we expect delinquencies and defaults to remain higher in outer suburbs."