Moody’s & Reserve Bank of Australia Warn of Increasing Mortgage Arrears and Looming Apartment Defaults Last Wednesday Moody’s reported that mortgage arrears continue to rise across Australia, particularly in the mining states of WA & NT: Moody’s report notes that mortgage performance deteriorated in all eight Australian states and territories over the year to 31 May 2016, reaching 1.50% from 1.34% at 31 May 2015. And, in Western Australia, Tasmania and the Northern Territory, the 30+ delinquency rate climbed to the highest levels since Moody’s records began in 2005, while in South Australia, the delinquency rate was just 0.1 percentage point below the state’s record-high reached in April 2013.Western Australia fared the worst in terms of mortgage performance over the year to 31 May 2016, with the 30+ delinquency rate increasing by 0.69 percentage points to 2.33%. This measure has been on the rise in the state since 2014, following the end of the mining boom. Relatively poorer economic and housing market conditions in Western Australia contributed to the historically high level of mortgage delinquencies. Delinqueny Rates, Western Australia, Northern Territory, Compared In Australian regions dependent on the mining boom, delinquencies and defaults have risen sharply.
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Moody’s & Reserve Bank of Australia Warn of Increasing Mortgage Arrears and Looming Apartment DefaultsLast Wednesday Moody’s reported that mortgage arrears continue to rise across Australia, particularly in the mining states of WA & NT:
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Delinqueny Rates, Western Australia, Northern Territory, Compared In Australian regions dependent on the mining boom, delinquencies and defaults have risen sharply. It seems highly likely that the bust is eventually going to spread to the large Eastern and Southern coastal cities given the degree of overvaluation based on fundamental criteria. - Click to enlarge |
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Western Australia benefited most from the mining boom and has been suffering a bust considered to be the worst in living memory now for many months:
Those previously highly paid resources or engineering workers now need to service their McMansion mega mortgage with an Uber wage and with each month that passes their equity continues to fall: |
Perth Dwelling Price Growth In Perth, the largest city in Western Australia, prices have begun to decline, eroding the equity of mortgage debtors, raising LTV ratios and thus the value of the collateral banks hold against the loans they have extended. - Click to enlarge |
| Don’t expect that trend to change any time soon. The mining bust is at best only half way through so there’s still alot more pain to come for WA before there can be any hope of recovery: |
Value of Construction work Construction spending in Western Australia is nosediving - Click to enlarge |
| So while WA has been doing it tough the rest of the country has managed to avoid the pain, predominately due to the economic benefits of an ever growing property bubble. Take for example the apartment approval pipeline since the GFC. The expression, make hay while the sun shines just doesn’t seem to come close to what’s been going on in that space: With the long run averages you can see that Australia has experienced an apartment boom like never before. As with other aspects of the Australian bubble this risk doesn’t affect all cities equally. While Sydney has seen the greatest boom in apartments it is Brisbane and Melbourne that are at most risk. |
Potential uplift in stock per region Expected growth in total apartment/ condominium stock if all planned developments are actually finished - Click to enlarge |
It’ is perhaps no surprise then that on October 13th the Reserve Bank of Australia issued a stark warning in their Financial Stability Review:
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Estimated growth of inner city apartment completions Estimated growth of inner city apartment completions segmented into 6-month blocks. - Click to enlarge |
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They then go on to warn of the risks to the Australian Banks:
You could argue that the banks have designed their business to be able to take strain like this and I would agree that they should have. What they aren’t prepared for though is a perfect storm of high impact risks which are likely to occur simultaneously in the next 6-24 months, such as:
The government, regulators, media and vested interests are all captured and will tell you all is well, but the global hedge funds and institutional investors are clear about what they expect to happen. They are placing bigger and bigger bets that the Australian Banks aren’t prepared. |
Commonwealth Bank of Australia, weekly and daily chart. Commonwealth Bank of Australia, weekly and daily chart. Readers who are able to trade CDS on these banks may want to consider these instruments as well (whether as hedges or outright bets), given the funding risks the sector is likely to face in the event of a crisis – click to enlarge. - Click to enlarge |
With China built out and the Australian Government out of monetary options will CBA and the other banks be so lucky a second time around. The last option to save it would be the tax payer funded $380 Billion bailout package, which itself may not be enough given that the big four’s assets are over four times the size of the economy.
No bubble is the same and the Australian bubble has many different but interrelated drivers. While one part of the market is collapsing other regions continue either sideways or even manage to grow a little. Recent data releases from both Moody’s and the Reserve Bank of Australia however show that the trend is worsening. With both threats and vulnerabilities increasing the best case the banks and community can hope for now is that it goes sideways or deflates slowly for an extended period.
If there was to be end of business cycle event though like the last GFC though it will all unravel very quickly.
Chart Captions by PT
Charts by: Moody’s, MacroBusiness, Corelogic
Tags: Featured,newsletter,Real Estate