- Tighter lending standards could lead to more borrowers being forced into arrears on their home loans.
- However, research from RiskWise property said the major east coast markets leading the downturn are well placed to absorb such a shift.
- RiskWise CEO Doron Peleg said the impact of mortgage delinquencies needs to be assessed within the context of Australia’s two-speed housing market.
Tighter lending standards have been cited as one the major catalysts for Australia's housing market downturn.
And for the downturn to turn into a crash, any pending "credit crunch" would most likely have to give rise to a sharp increase in mortgage delinquency rates.
Right now, the number of borrowers in arrears on their home loan is low.
However, some have speculated that may change as banks crack down on credit and more borrowers are forced to switch into principal and interest mortgage repayments.
A sharp rise could result in more forced sales, which would exacerbate the existing price falls.
But according to research from RiskWise Property, the major east coast markets where prices are falling the fastest should be well-placed to withstand such a change.
"There could be some small pockets of increased supply and reduced profits, but overall there won’t be a tsunami of forced sales," RiskWise CEO Doron Peleg told Business Insider.
"There is only a very small proportion of people who bought very recently, experienced price reduction and are struggling with mortgage repayments who are potentially at risk."
In addition, research from RiskWise suggests the relationship between mortgage delinquencies and house prices isn't a simple one.
"While it’s true that if there are arrears you can have forced sales and therefore price corrections, this is not necessarily the case in all property markets," Peleg said.
For evidence, he looked at historical data from 2015. The table below shows postcodes in each Australian state with the highest number of credit default rates that year:
The definition of "credit default rate" is mortgage borrowers who are 90+ days in arrears on their home loan.
To get a sense of what effect mortgage delinquency rates had on house prices, RiskWise then tracked the capital growth of house prices in high-default areas.
“Our research shows that a large number of postcodes in NSW and Victoria which had high default rates also had strong capital gains," Peleg said.
"This means the risk of forced sales and the inability to refinance is much lower."
As an example, Peleg said 15 of the 18 high-default postcodes in Victoria had outperformed the national growth benchmark for house prices. Thirteen of those 18 suburbs also outperformed in the apartment market.
The resulting equity buffer means more borrowers in those markets will have an easier time refinancing.
"Add to that a strong job market in both Sydney and Melbourne, meaning people have stable incomes, it follows that even if the market does fall dramatically they are at least able to hold on to their properties for longer periods," Peleg said.
Conversely, other postcodes -- particularly ex-mining suburbs in Queensland and WA -- have had to absorb the dual effect of rising delinquencies and falling house prices over the last three years.
“This left many owners exposed to significant equity risk as well as cash-flow risk due to very low rental incomes and very high vacancy rates -- a major factor in mortgage stress and defaults,” Peleg said.
But given the sharp variation in fundamentals between different markets, Peleg said it's important not to take a "blanket" approach when assessing the impact of delinquencies.