Sydney, where housing market and economic conditions were the most supportive for mortgage borrowers, accounted for the majority of regions and postcodes with the lowest delinquencies, Moody's said.

The report analysed mortgage performance by region and showed that the outbacks of Western Australia and Queensland were the worst performing regions, with those states accounting for nine of the ten worst performing regions with arrears of between 2.34 per cent and 4.72 per cent.

The six best-performing regions were in NSW – the Northern beaches, North Sydney, the city and inner south, Ryde, the Eastern suburbs and the Inner West where arrears were between 0.34 percent and 0.74 per cent.

Manly, Elanora Heights and Newington in NSW were the best-performing post codes. Alpurrulam, Kiingston and Moorina in Queensland were the worst.

Borrowers in rural arrears were also under more stress as capital cities registered lower arrear rates "reflecting the higher levels of economic diversity and employment stability in city areas."

Arrears in Sydney as of May totalled 0.91 per cent, while Melbourne's arrears totalled 1.40 per cent.

Home prices rise 31pc


Earlier this month, Moody's warned about the risks posed by the supply of new apartments in Sydney and Melbourne, on property prices.

The Reserve Bank of Australia has also devoted several pages of its semi-annual review of risks in the financial system to the pending apartment glut and its impact on the banks.

Mortgage delinquency rates in Australia. Moody's

Such a situation will exert pressure on home prices and rental returns, and raise the risk of mortgage delinquencies and losses.

The agency also cited its concerns that house price growth had expanded by more than the incomes required to service loan and pay rents.

"While home prices in Australia have risen 30.69 per cent over the three years to 31 August 2016, average weekly earnings have increased only 5.06 per cent.

"The large differential between home price and wage growth — particularly in Sydney and Melbourne where home prices have increased the most — means that households have had to take on more debt to fund home purchases."

Australia's 20 worst-performing postcodes. Moody's

While the agency expected a further decline in arrears, it would be moderate as a weaker currency would support the growth of services sectors and mitigate the mining slow-down.