Maria Irene
Australia’s mortgage market is as diverse and fascinating as the continent itself, pulsing with the rhythm of economic trends and policies. Recently, this financial landscape has presented some intriguing dynamics that S&P Global Ratings, a prominent provider of independent credit risk research and benchmarks, keeps a watchful eye on.
From their perch, they offer insights into a future spanning three to five years, focusing on crucial factors such as economic growth and unemployment rates. For instance, the projected foreclosure frequency for ‘B’ rating level is pegged at 1.1%. This figure applies to loans evaluated during an economically tranquil period characterized by a stable or upbeat outlook. Should economic conditions shift, this frequency might be revised but is not expected to dip below the 1.1% mark. In comparison, the ‘AAA’ level assumptions display a steadier behavior, expected to ride out regular economic cycles with aplomb, barring any seismic economic and market shifts.
Such forecasts for the Australian RMBS market serve as a cornerstone for the projected loss assumptions for characteristic mortgage pools. As we edge into 2023 and 2024, the RMBS’s performance seems poised for stability. This projection leans heavily on largely unchanging economic conditions and moderate unemployment levels slated for these years. Factors like the interest-rate milieu and underlying property market price expectations also play crucial roles in this evaluation.
The current trend line for the Australian RMBS market, as charted by S&P Global Ratings, appears to be one of stability. This outlook draws from an encompassing understanding of the macroeconomic landscape, intertwining elements like economic growth, unemployment rates, and the housing market’s health.
The ‘B’ level foreclosure frequency, locked at 1.1%, is relevant to loans scrutinized during an economically calm period marked by a stable or positive outlook. While this frequency may undergo adjustments reflecting economic swings, it is not expected to slide below the 1.1% threshold.
On the unemployment front, we foresee a slight uptick to 4.2% in 2023 (averaged across the year), and 4.4% in 2024. Despite these projections, the economic outlook for 2023 and 2024 remains bright, even considering a gradual deceleration following the post-pandemic boom of 2022.
The rollercoaster ride of the Australian residential housing market is another key factor. House prices, after a robust two-year run, dipped in 2022. This downward trend is projected to continue in an orderly fashion into 2023. Over the long haul, house prices are likely to draw strength from limited new supply, resurgent post-pandemic immigration, and broader household formation trends.
Advancing into 2023 and 2024, the performance of RMBS is anticipated to maintain a steady pace, with the prediction hinging on expected economic stability and moderate unemployment levels. The interest-rate atmosphere and underlying property market price expectations have been factored into this outlook.
Despite heightened financial stress on home borrowers stemming from rising interest rates, mortgage arrears rates in Australia demonstrate remarkable resilience. The Reserve Bank of Australia’s cash rate climbed from virtually zero to an 11-year zenith of 4.1% within the past year. Even so, the Australian Prudential Regulation Authority’s June report indicated that non-performing home loans were significantly below pre-pandemic levels, representing just 0.72% of outstanding residential mortgages. Corroborating this, S&P Global Ratings noted that while some home borrowers trailed in loan repayments, the overall share of mortgage arrears remained below long-term averages.
S&P Global Ratings’ prediction of stability in the Australian RMBS market hinges on a handful of determinants, including unemployment, the economy’s pulse, the dynamics of the Australian residential housing market, and interest rates. The ‘B’ level foreclosure frequency for loans assessed during an economically benign period, marked by a stable or positive outlook, is projected at 1.1%.
However, we anticipate unemployment to rise slightly, to 4.2% in 2023 and 4.4% in 2024. On the brighter side, GDP growth is predicted to remain positive through 2023 and 2024. In contrast, house prices, after a two-year upward journey, began declining in 2022. This downward trend is expected to continue into 2023 but is likely to stabilize due to limited new supply, renewed immigration, and broader household formation trends.
From a bird’s eye view of the macroeconomic landscape, the Australian RMBS market, as seen by S&P Global Ratings, leans towards stability. This steadiness is likely to be mirrored in the performance of RMBS in 2023 and 2024, in line with the expected stable economic conditions and moderate unemployment.
The Australian mortgage market offers a mesmerizing dance of numbers and trends. S&P Global Ratings, through its diligent analysis and projections, serves as our guide into understanding this intriguing dance. As we venture further into the future, these insights and expectations will continue to illuminate our understanding of the Australian RMBS market and its trends for 2023 and beyond.
