Investment Loan Arrears at Record Low Thanks to Current Benign Environment Investment loans are performing better than owner-occupied properties in terms of 90+ day arrears. Investment property loans’ 90+ day delinquencies are 0.81x those of owner-occupied loans, reflecting the low-interest-rate environment and the booming property market.
Investment loans do not always outperform owner-occupied loans, however. In the decade to December 2014, 90+ days arrears for investment mortgages has been on average 1.15x the level for mortgages collateralised by owner-occupied properties.
Investment mortgages have shown a strong correlation with house prices at both national and state level, and performed much better in a low-interest-rate environment – most likely reflecting better net yields and the ability to easily dispose of property in the current environment.
The record-high settlement of investment loans reflects the perceived safe haven of Australian residential property, the low cost of debt funding, and the poor investment returns on offer from other asset classes. As of end-December 2014, 27.5% of securitised mortgages rated by Fitch were classified as lending for investment purposes. Queensland and New South Wales have an above-average concentration of investment properties.
What to Watch
More Volatile Product: Fitch Ratings believes there is additional risk in investment loans, and performance is substantially affected by movements in property prices. Investment loans are currently enjoying the best possible conditions in light of this correlation, and this is reflected in mortgage performance. Fitch, however, believes that the product is higher risk, and treats it more harshly in the agency’s analysis.
Rental Yields and Regulation: Australia is enjoying low vacancy rates (compared with residential rental markets in other countries), and the current tax incentives are a boost to the rental yields and borrowers’ serviceability. Volatility in vacancy rates or regulation may have a significant impact on the mortgage performance of investment loans. Ratings Impact: Fitch assumes a 25% higher base default probability in the case of a mortgage collateralised by an investment property, compared with an owner-occupied property.
We believe that investment-property loans will have a higher probability of default in an economic downturn, as borrowers will fight harder to protect their primary residence.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
