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2020 Outlook Assumptions For The Australian RMBS Market

S&P Global Ratings is providing its updated outlook assumptions for the Australian residential mortgage-backed securities (RMBS) market. We review our outlook assumptions periodically, and update them in response to changes in the economy and housing markets. This article is related to our "Principles Of Credit Ratings" criteria, published on Feb. 16, 2011.

Our outlook and assumptions for rated Australian RMBS is unchanged, despite some slowing in macroeconomic conditions. We consider a range of factors that underlie defaults, and therefore losses for the archetype should not weaken outside our assumptions for the base case. Despite more modest growth expectations and soft consumer sentiment, the economic forecasts overall are supportive of current loss assumptions. Some factors have improved since 2019 as property market sentiment recovers along with house prices.

We expect macroeconomic conditions in Australia will remain stable in 2020, which we believe will remain positive for RMBS loss performance. Wage growth remains slow and consumer conditions are subdued. S&P Global Ratings' base-case scenario forecasts GDP growth to improve to 2.2% in 2020 from 1.8% in 2019 and unemployment to remain stable at 5.3% in 2020.

Broadly stable employment conditions and our outlook for economic growth support our loss expectation for the archetypical mortgage pool. Loss of income is a primary cause of mortgage default.

Macroeconomic conditions remain broadly positive; however, growth has slowed in tandem with the global economy. Slow wage growth and soft consumer sentiment continue to contribute to a subdued consumer sector. Australia's household indebtedness remains high by global measures and could amplify the effect of any shock to the domestic economy.

Risks related to the housing sector eased during 2019. Home prices have stabilized, with prices in the largest markets, Sydney and Melbourne, turning a corner after declining from late 2017. While credit growth remains constrained, recent interest-rate cuts and some relaxation in macroprudential measures such as debt-serviceability assessments are supportive of a return to more average levels of activity in housing markets. We expect housing prices to remain broadly stable, with modest growth for the next 12 months; we expect conditions to be supported by stable economic conditions and positive population growth. Additionally, we believe regulators will continue to be proactive in managing risks emerging in housing and credit market conditions.

The key risks in the Asia-Pacific region are the ongoing U.S.-China trade dispute dampening business confidence, and its impact on investor risk aversion; mixed funding conditions across the region; a property price correction, which remains a risk in some markets; and China's ability to manage deleveraging and rebalancing in its economy (see "Credit Conditions Asia-Pacific: Rate Relief, Risks Remain," published Dec. 3, 2019). These factors and uncertainty associated with these risks could act as a drag on investment, growth, and confidence, and flow through to Australian households.

We believe risks to Australia's RMBS sector have eased slightly relative to a year earlier. We believe a base-case market-value decline assumption of 30% for the archetypical pool, 12-month liquidation period, and foreclosure frequency assumption of 1.1% remain appropriate, given our outlook for the Australian economy.

Our outlook assumptions for the Australian RMBS market support 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 guidance, "Methodology And Assumptions For The Australian, Japanese, And New Zealand Residential Mortgage Markets," published Jan 15, 2019. 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 credit-enhancement at a 'B' rating level is 0.4% of the outstanding pool balance.
  • Our expectation that the performance of RMBS in 2020 will remain relatively stable, based on our forecast of stable employment conditions and low interest rates.
  • Our opinion that the various assumptions underlying the 0.4% 'B' credit-enhancement level outlined in our criteria remain appropriate in the current market conditions.

Related Criteria And Research

Related Criteria
  • Australian RMBS Rating Methodology And Assumptions, Sept. 11, 2011
  • Principles Of Credit Ratings, Feb. 16, 2011
Related Research
  • Credit Conditions Asia-Pacific: Rate Relief, Risks Remain, Dec. 3, 2019
  • An Overview Of Australia's Housing Market And Residential Mortgage-Backed Securities, Nov. 14, 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 Contacts:Kate J Thomson, Melbourne (61) 3-9631-2104;
kate.thomson@spglobal.com
Erin Kitson, Melbourne (61) 3-9631-2166;
erin.kitson@spglobal.com

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