Ratings agency Moody's expects further house price declines will lead to a moderate increase in mortgage delinquencies in coming months.
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High debt levels and the conversion of interest-only mortgages to
principal and interest mortgages will also drive up deliquencies, which ticked up slightly in the December quarter.
House prices in Australia declined by 6.3 per cent for the 12 months to February 2019, while Sydney and Melbourne declined by 10.4 per cent and 9.1 per cent respectively, Moody's noted.
"We expect prices to continue to decline moderately over the remaining months in 2019," it said in a market briefing.
Australia's record-high household debt, which
amounts to 191 per cent of annual gross disposable income, could also contribute to a moderate rise in delinquencies.
"Meanwhile, a large number of interest-only mortgages are due to convert to principal and interest loans over the next two years, which will cause some delinquencies over this period."
Banks originated "a significant volume" of interest-only loans in 2014 and 2015 which will roll off the the five year interest-only period this year and next year, Moody's noted.
"When interest-only loans convert to principal and interest, borrowers have to make higher monthly repayments, which can lead to delinquencies."
The rapid fall in house prices prompted a warning this week from BIS Oxford Economics that Sydney's house prices could fall by up to 30 per cent by the time the downturn is over if its decline doesn't slow down by the third quarter of the year.
As well, prices could fall even further under Labor's proposed changes to negative gearing and capital gains - by as much as 12 per cent over the next three years - according to a new report by SQM Research.
On Moody's view, mortgage delinquencies will only increase moderately, while defaults and losses will remain low, as long as there is continued GDP growth and low unemployment supporting borrowers' ability to meet their mortgage repayments.
Delinquencies are likely rise over the short term in areas hit by the far north Queensland floods in February 2019, the ratings agency said.
