Standard & Poor’s this month published its outlook assumptions for the Australian residential mortgage market to support its view of loss expectations for archetypical mortgage pools, as defined in its updated RMBS criteria article. Standard & Poor’s credit analysis of mortgage pools, which incorporates this outlook and expected loss scenario, reflects:
- The loss expectation for the archetypical RMBS pool, and our view that the baseline credit-enhancement level associated with a ‘B’ rating for RMBS is 0.4% of the current pool balance.
- Standard & Poor’s expectation that the performance of the Australian residential mortgage market for the remainder of 2011 will remain stable.
- Our opinion that the market-value decline assumptions underlying the 0.4% ‘B’ credit-enhancement level outlined in today’s criteria article are appropriate under this stable market scenario.
Volatility in global markets and weaker growth prospects in Europe and the U.S. are exacerbating the uncertainty and risks associated with Australia’s growth outlook. Nonetheless, the loss expectation for the archetypical mortgage pool is based on our expectation that Australia’s economic growth outlook will remain sound over the next three-to-five years. This outlook reflects a continuing strong pipeline of committed domestic business investment (mostly in the resources sector), and ongoing high demand and prices for Australia commodity exports from key Asian trading partners.
We expect Australian house prices and market turnover to remain subdued in the next 12 months. Average house prices are about 2.7% lower than their December 2010 peak, and there is ongoing weakness in residential building approvals and housing finance commitments from home buyers and investors. Rising borrowing costs and an unwinding of grants for first-home buyer explain some of the weakness in the housing market. Low household confidence and spending habits explain much of the rest. We still believe the Australian housing market will avoid a sharper correction, provided a shortage of housing stock continues and Australia’s macroeconomic fundamentals and outlook feature low unemployment, sound population and income growth, and supportive trading partner growth. This view is reflected in Standard & Poor’s outlook for the Australian RMBS market. Given this outlook for the Australian economy, Standard & Poor’s believes the base-case expected loss of a 30% market value decline for the archetypical pool, and 12-month liquidation period, remains appropriate.
Standard & Poor’s outlook assumptions for the Australian RMBS market can be seen at: “Outlook Assumptions For The Australian Residential Mortgage Market” (Sept. 1, 2011: http://www.standardandpoors.com/prot/ratings/articles/en/au/?articleType=HTML&assetID=1245319354402).