Investor loans to deteriorate when rates rise: report

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A new report by Moody’s Investors Service has flagged increasing risks in the Australian housing market despite recent figures pointing to a moderation in price growth.

In the report on the performance of LMI provider Genworth Australia, Moody’s vice-president and senior credit officer Ilya Serov warned that “tail risks” in the housing market remain a key threat.

“While housing market activity slowed in the second half of 2015 on the back of regulatory measures, house prices remain elevated relative to incomes, and household debt levels are rising again,” Mr Serov said. “The full effects of these measures are not yet certain."

In a section of the report titled ‘Developments in the Australian Housing Market’, Moody’s states that “tail risks in the Australian housing market have been increasing.”

The report highlights that dwelling prices have been growing rapidly in the key Sydney and Melbourne markets, having risen 39 per cent and 31 per cent respectively between June 2013 and February 2016.

“House price inflation has to a large degree been driven by investor lending, which we see as of higher risk than owner-occupier mortgage loans,” it said.

“While the performance of investor loans has remained healthy, we expect delinquency and loss rates associated with such lending to deteriorate in a more stressful economic environment or in a scenario of rising interest rates.

“Our data shows that investor loans perform better than owner-occupier loans during periods of low interest rates, but that the converse is true when interest rates rise.”

Last month, Moody’s Investors Service warned that a slowing housing market and rising macroprudential challenges will lead to an increase in Australian mortgage delinquencies this year.

Moody's assistant vice-president and analyst Alena Chen said while the month-on-month increase in delinquencies recorded in November is typical and reflects increased spending in the run-up to the holiday season, Moody's expects mortgage delinquencies to be higher in 2016 than in 2015.

[Related: Mortgage brokers 'create risks' for smaller lenders: Moody's]

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