Debt stress in Aussie mining towns vexes investors

Mining-heavy states have been hit hard, prompting warnings from policymakers, ratings agencies and the OECD.
Mining-heavy states have been hit hard, prompting warnings from policymakers, ratings agencies and the OECD.PHOTO: REUTERS

Mortgage pain due to downturn; experts fear stress may spread if faith in real estate is lost

SYDNEY • Australia's quarter-century run of uninterrupted economic growth has made its property market one of the world's most expensive, but mortgage pain in towns hit by a commodities downturn is beginning to be felt in parts of the financial system.

While most Australians are able to pay their debts, alarm bells have sounded around pockets of distress in the mining-heavy states, prompting warnings from policymakers, ratings agencies and the Organisation for Economic Cooperation and Development (OECD).

In the remote mining town of Karratha in Western Australia, Mr Peter Lynch, 61, received a letter advising him that his bank was going to repossess his house at the end of the month.

"My property in 2010 was worth A$905,000, today it's worth A$260,000 (S$277,500)," he said, estimating that seven out of 20 homes on his suburban street were for sale. Two decades ago, Mr Lynch borrowed money to buy a five-bedroom house in the town, thinking his job as a railway maintenance worker at Rio Tinto would last until he retired. But the end of a "once-in-a-century" mining boom changed all that. He now owes A$222,000 and earns A$42,000 a year as a cleaner, roughly half his pay at the mine.

Western Australia is the hardest-hit Australian state with delinquencies topping 2.1 per cent, up by nearly half year on year, according to credit ratings house S&P Global.

PLUMMETING PRICES

My property in 2010 was worth A$905,000, today it's worth A$260,000 (S$277,500).

MR PETER LYNCH, on his five-bedroom house in the mining town of Karratha in Western Australia.

S&P Global said that 30-day arrears on mortgages packaged in issued securities are at multi-year highs.

Senior analyst Alena Chen at Moody's expects rising underemployment and weak wage growth to drive delinquencies higher in mining-intensive states.

There are signs of stress in the mortgage insurance market - shares in Australia's largest mortgage insurer, Genworth Mortgage Insurance, are down 19 per cent since early last month. The company, which provides protection to lenders from borrowers defaulting on their home loans, last month reported an 11 per cent profit drop last year due to a jump in mortgage delinquencies.

Australian borrowers typically pay for insurance when they have less than a 20 per cent deposit on their home purchase. Genworth said last month that last year's loss ratio of 35.1 per cent, up from 24 per cent in 2015, reflected higher average paid claims in resources-exposed regions, particularly Queensland and Western Australia.

Australia's major banks remain in good health and the mortgage-backed securities market, which finances the loan books of smaller banks and lenders, enjoys strong investor demand. And unlike the United States, Australia has had no mortgage-backed bond defaults.

But investors and economists are worried stress could spread should there be a sudden loss of faith in the property market.

Real estate is a national obsession in Australia where two-thirds of households own a home. Since 2009, home values in the nation's largest city of Sydney have more than doubled, while those in Melbourne have increased 88 per cent.

Australian households are among the world's most indebted, with a debt-to-disposable income ratio at an all-time peak of around 180 per cent, compared with about 100 per cent in Germany and 150 per cent in the US. Domestic mortgage debt stands at a whopping A$1.7 trillion, equal to the country's entire annual economic output.

Last week, the OECD singled out a "dramatic house-price correction" as the biggest threat to the Australian economy.

Central bank governor Philip Lowe last month said the bank is wary of easing further for fear of creating housing vulnerabilities, particularly in the mining states.

REUTERS

A version of this article appeared in the print edition of The Straits Times on March 11, 2017, with the headline 'Debt stress in Aussie mining towns vexes investors'. Print Edition | Subscribe