Current Australian home price growth levels unsustainable: Fitch Ratings

Fitch Ratings believes the current Australian annual rate of price growth is unsustainable, particularly in the Sydney and Melbourne markets.

The combined capital city price growth was 9.27% year on year, led by Sydney, Melbourne and Darwin.

The rate of growth remains high, but has eased since the peak in April 2014, it noted.

Growth in property prices have historically reflected a decrease in 90 plus days arrears, suggesting that high house prices have allowed borrowers to sell properties and clear arrears.

Fitch says competitive lending, high house prices and low interest rates drove improvements across all arrears, with its Dinkum RMBS Index dropping 14bp to 1.08% in 3Q14 - the lowest level in over six years. In 3Q14, 90+day arrears dropped 4bps to 0.47% - the lowest level since December 2009. And 30-59 days arrears fell to the lowest levels since August 2004.

But Fitch expects the next increase in rates would deliver a short-term shock to borrowers’ serviceability.

Fitch sees unemployment as the major driver of mortgage performance.

"The unemployment rate rose 0.2pp to 6.2% in October 2014, potentially leading to the materialisation of long-term arrears in 1Q15," the Fitch release said.

Fitch forecasts unemployment to remain relatively stable, and for interest rates to remain low in 2015.

Higher levels of unemployment, a slowdown in the housing market, and rising interest rates, could lead to servicing pressure, and in turn, higher delinquencies and low foreclosure activity.