A new report from the global credit agency has flagged a looming slowdown in housing credit and rising risks across mortgage portfolios.
Moody’s Ratings has said that Australia’s new property tax regime, together with higher interest rates, is set to cool housing credit growth, trim bank profitability, and nudge mortgage delinquencies higher.
In the report, Moody’s examined the federal government’s changes to negative gearing and capital gains tax (CGT) and how they intersected with the recent tightening cycle.
The agency said that the combination would take the heat out of residential turnover and price appreciation over the next few years.
Moody’s framed the housing tax shake-up as a clear drag on activity.
“These changes, together with rising interest rates, will hurt residential market activity,” Moody’s said.
“The tax reforms will slow property transaction volumes and constrain national house price growth at a time when rising interest rates and broader global economic uncertainty linked to the Middle East conflict are already weighing on consumer confidence.”
Yet looking beyond the initial shock, the report said that directing investor incentives away from existing stock towards new projects would improve affordability.
“Still, longer term, these tax measures should improve housing affordability and increase supply as investor demand shifts to new builds, which are not affected by the tax changes,” the report said.
Investor retreat to hit credit growth and bank balance sheets
Moody’s devoted considerable attention to the investor segment, which has recently driven much of the growth in new housing lending.
It said that investor loans now accounted for roughly two‑fifths of new mortgage flows – meaning a sizeable reversal in this channel would have a significant impact on headline credit growth and bank revenue.
The agency said that the shift in tax settings would erode one of banks’ highest‑margin businesses.
“As investor loans typically generate higher margins, a structural decline in this segment will weigh on banks’ earnings and net interest margins (NIMs),” it said.
“The short-term credit effects of the tax changes are likely to be negative. Lower credit demand from investors is unlikely to be offset by growth in demand from owner-occupiers.”
Yet over time it sees some improvement in the risk mix, saying that “a structural decline in investor lending – typically done at higher loan-to-value ratios and with interest-only features – will modestly strengthen asset quality”.
RMBS risks up, but protections in place
With rates higher and turnover slowing, Moody’s expects more pressure on borrowers carrying investment debt and larger strain on securitised pools.
“In structured finance, higher interest rates will increase delinquency and default risk in residential mortgage-backed securities (RMBS),” the report said.
“Slower housing sales and price growth will weaken recoveries in cases where borrowers default and homes are sold to recoup outstanding debt.”
However, the agency said that added subordination and other structural features should “help contain losses for RMBS noteholders” and that a likely fall in the share of housing investment loans in RMBS collateral pools is “credit positive because these loans are riskier than owner-occupier mortgages”.
“Strong provisioning buffers, low dynamic loan-to-value ratios (under 50 per cent) and resilient household balance sheets will contain credit losses,” it said.
[Related: Banks slice mortgage rates as competition heats up]
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