S&P Global Ratings is providing its updated outlook for the Australian residential mortgage-backed securities (RMBS) market. We review our outlook periodically, and update in response to changes in the economy and housing markets.
This article provides updated views behind our assumptions for the Australian residential mortgage-backed securities (RMBS) market. It is an update to "2021 Outlook Assumptions For The Australian RMBS Market," published on Jan. 11, 2021. We disclose our assumptions in "Methodology And Assumptions For The Australian, Japanese, And New Zealand Residential Mortgage Markets," which we published on Jan. 15, 2019, and most recently updated on May 19, 2020 (hereafter "2019 guidance").
We have revised our outlook for Australian RMBS reflecting our views of changing macroeconomic conditions as we move through the COVID-19 pandemic.
S&P Global Ratings believes the omicron variant is a stark reminder that the COVID-19 pandemic is far from over. Uncertainty still surrounds its transmissibility, severity, and the effectiveness of existing vaccines against it. Early evidence points toward faster transmissibility, which has led many countries to reimpose social distancing measures and international travel restrictions. Over coming weeks, we expect additional evidence and testing will show the extent of the danger it poses to enable us to make a more informed assessment of the risks to credit. In our view, the emergence of the omicron variant shows once again that more coordinated and decisive efforts are needed to vaccinate the world's population to prevent the emergence of new, more dangerous variants.
Under our criteria, the 'B' projected loss level for an archetypal residential loan pool matches our base-case loss expectations, and therefore varies according to changes in our outlook for the mortgage market. The outlook considers, but is not limited to, factors such as economic growth and unemployment rates, and the horizon for the outlook is three to five years. For the archetypal pool, we set the 'B' foreclosure frequency assumption at 1.1% for loans that are assessed during a benign economic period with a stable or positive outlook. We could revise our outlook and subsequently our 'B' projected foreclosure frequency assumption to reflect changing economic conditions as warranted, but generally would not expect the 'B' projected foreclosure frequency assumption to be less than 1.1%.
Because our 'B' (or 'AAA', if applicable) assumptions change with our outlook, the foreclosure frequencies for the rating in between would also fluctuate, as determined by interpolating between the 'AAA' and 'B' levels. As we adjust our 'B' projected foreclosure frequency to reflect our outlook for a stressed economic environment, we would expect the foreclosure frequencies at all rating levels to compress toward the 'AAA' foreclosure frequency.
Given the outlook for the Australian economy and housing market, we have revised the 'B' projected foreclosure frequency down to 1.1%, which is consistent with pre-pandemic levels. This is based on our views of various factors, including:
- That our expectation for unemployment conditions are positive and recovering well from pandemic related peaks. As of Nov. 30, 2021, we expect unemployment in Australia to fall to 4.5% in 2022 (average for 2022) and 4.3% in 2023. The Australian Bureau of Statistics reported unemployment at 4.6% in November 2021.
- Economic conditions are supported by the reopening of the economy and vaccination rollouts. Our expectation is that any COVID-19 related disruptions to consumer activity, industries, or geographies will have a diminishing effect over time.
- The state of the Australian residential housing market. While house prices have experienced strong growth in 2021, we view supply and demand factors to be operating within reasonable tolerance bands. We believe that most markets will experience some level of appreciation in 2022, but also expect to see measures designed to manage stability in financial markets to act to indirectly limit house price growth.
- That forbearance measures for mortgagors have wound down and do not represent a systemic risk to housing markets.
- The winding down of government support related to the health pandemic, including significant fiscal support to businesses and consumers, such as wage subsidies, will be removed in a staged manner. These measures have supported households and business throughout the pandemic. We believe that targeted support will be provided going forward as needed to affected areas and industries.
Our assumptions for the 'AAA' level remain unchanged because we expect the 'AAA' foreclosure frequency assumption for an archetypal pool to be constant during normal economic cycles (i.e., a cyclical trough no worse than a moderate stress). However, we could increase it if economic and market conditions migrate significantly beyond the normal cycle. Table 1 provides the rating level archetypal assumptions that are based on the application of our criteria and disclosed in the 2019 guidance.
Table 1
| Key Credit-Enhancement Components For The Archetypical Pool By Rating | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rating scenario | ||||||||||||||
| AAA | AA | A | BBB | BB | B | |||||||||
| Credit enhancement (%) | 5.0 | 3.6 | 2.3 | 1.4 | 0.8 | 0.4 | ||||||||
| Foreclosure frequency (%) | 10.0 | 7.5 | 5.0 | 3.2 | 2.1 | 1.1 | ||||||||
| Loss severity* (%) | 50 | 47 | 45 | 41 | 36 | 31 | ||||||||
| *We have calculated loss severity for Illustration purposes by assuming 5% variable selling costs, A$5,000 fixed selling costs, a metropolitan property of A$100,000, and an interest rate through accrual of 12.75%. | ||||||||||||||
Our outlook for the Australian RMBS market supports our view of loss expectations for archetypical mortgage pools, as defined in our "Australian RMBS Rating Methodology And Assumptions" criteria, published Sept. 11, 2011, and associated 2019 guidance. These articles reflect our outlook, including:
- Our view on expected losses for the Australian archetypical RMBS pool, and our current opinion that the base-case foreclosure frequency assumption has decreased to 1.1% at a 'B' rating level.
- Our expectation that the performance of RMBS will be stable into 2022 and 2023, based on improving economic conditions and lower levels of unemployment forecast for those years. We have also considered in our assessment the low interest-rate environment and underlying property market price expectations.
- Our opinion that the other assumptions underlying the 'B' credit-enhancement level outlined in our criteria remain appropriate in the current market conditions.
Related Criteria
- Australian RMBS Rating Methodology And Assumptions, Sept. 11, 2011
- Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Asia-Pacific: Ghosts Of COVID Past Hover Over 2022, Nov. 30, 2021
- An Overview Of Australia's Housing Market And Residential Mortgage Backed Securities, Nov. 18, 2021
- 2021 Outlook Assumptions For The Australian RMBS Market, Jan. 11, 2021
- Methodology And Assumptions For The Australian, Japanese, And New Zealand Residential Mortgage Markets, Jan. 15, 2019
This report does not constitute a rating action.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analyst: | Narelle Coneybeare, Sydney + 61 2 9255 9838; narelle.coneybeare@spglobal.com |
| Secondary Contact: | Kate J Thomson, Melbourne + 61 3 9631 2104; kate.thomson@spglobal.com |
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