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 "2022 Outlook Assumptions For The Australian RMBS Market," published on Jan. 7, 2022. We disclose our assumptions in "Methodology And Assumptions For The Australian And New Zealand Residential Mortgage Markets," which we published on Jan. 15, 2019, and most recently updated on Jan. 6, 2023 (hereafter "2019 guidance").
We have maintained our outlook for Australian RMBS reflecting our views of macroeconomic conditions.
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 maintained the 'B' projected foreclosure frequency at 1.1%. This is based on our views of various factors, including:
- That our expectation for unemployment conditions remain strong, even as they ease from recent record low levels. As of Nov. 28, 2022, we expect unemployment in Australia to increase to 4.2% in 2023 (average for 2023) and 4.4% in 2024. The Australian Bureau of Statistics reported unemployment at 4.6% in November 2022.
- Economic conditions, while slowing after the post pandemic strength of 2022, remain positive overall. We expect GDP growth to remain positive in 2023 and 2024.
- The state of the Australian residential housing market. House prices started to decline in 2022 after very strong appreciation in the prior two years. While we expect further declines in 2023, we expect the unwinding to be orderly. In the longer term we expect house prices to be supported by limited new supply, the resumption of immigration following the pause during the pandemic, and broader household formation trends to provide a floor to house prices.
- As interest rates adjust we expect that once stabilized, the indirect impact on house prices through borrowing capacity and overall consumer confidence will stabilize.
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 is 1.1% at a 'B' rating level.
- Our expectation that the performance of RMBS will be stable into 2023 and 2024, based on largely stable economic conditions and moderate levels of unemployment forecast for those years. We have also considered in our assessment the 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
- Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth, Nov. 28, 2022
- An Overview Of Australia's Housing Market And Residential Mortgage Backed Securities, Nov. 28, 2022
- 2022 Outlook Assumptions For The Australian RMBS Market, Jan. 7, 2022
- Methodology And Assumptions For The Australian 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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