Analyst claims Australian lenders are exposing their mortgage portfolios to a growing level of risk

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A financial analyst believes Australian lenders are exposing their mortgage portfolios to a growing level of risk.

Martin North, the principal of Digital Finance Analytics made the claim after Fairfax media revealed that the NAB has red-flagged 40 postcodes across Australia, believing they have an increased probability of defaulting.

NAB chief risk officer David Gall did not reveal to Fairfax the 40 postcodes, but he did say the bank had arrangements, such as higher loan to value ratios in place for borrowers from those areas.

The fact that the list exists and that those postcodes are subject to stricter lending criteria came as no surprise to North, who through his own modelling has identified differing levels of risk from postcode to postcode across the country.

“There are some areas that are eight or nine times more likely to default compared to others,” North said.

“But I don’t think banks will stop lending to people in those areas, I think lenders will just introduce measures like higher deposits and differential interest rates for those area, a list like NAB’s is just extra warning about lending in those areas rather than saying they won’t lend.”

North said risk levels for the mortgage portfolios of Australian lenders are being exposed to is growing at a steady rate and he believes it will continue increase in the near future.

“What I’ve been seeing over recent years is a steady progression in the level of risk lenders are exposing themselves to and there’s a combination of reasons that have led to that.

“One is that house prices are higher than they’ve ever been and another is that interest rates are so low that affordability isn’t too bad, but even an increase in interest rates by just a couple of percentage points would have a negative effect on lenders’ books.

“The other is that there is a slightly higher than usual level of loans that are in arrears at the moment and that’s because income growth is remaining static or falling while house prices have been growing.

“All of that is building pressure and when you overlay it with industry downturn and external factors like the situation in China, it all comes together to bake the cake.”

While obvious areas at risk are locations that a heavily dependent on the mining and resource sector, North said there are locations across the country that would be unnattracticve to lenders.

“There’s definitely some risk hotspots in the areas that have been hit by the mining downturn in Western Australia, Queensland and the Hunter Valley in New South Wales.

“But in Canberra there are some areas that are pretty sick, the federal government is cutting civil servants and house prices in Canberra are fairly high and then in South Australia there are some areas that are really being hit by what’s happening with the manufacturing of motor vehicles.”

While he doesn’t maintain a list of high-risk areas like the NAB, Mr North did reveal to Fairfax media some areas in NSW and Victoria that he considers to have a higher default probability.

In NSW North identified Blackville, Caroona, Colly Blue, Pine Ridge, Quirindi, Spring Ridge and Wallabadah (2343), Greta (2334), Riverstone (2765), Mount Annan (2567), Auburn (2144), Blaxland (2774), Chipping Norton (2170), Berala (2141) and Bass Hill (2197).

In Melbourne North identified Aberfeldie, Essendon and Essendon West (3040); Gladstone Park, Gowanbrae and Tullamarine (3043); Pascoe Vale (3044); Belgrave and Tecoma (3160); Mount Evelyn (3796); Endeavour Hills (3802); and Berwick and Harkaway (3806). 
 

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