‘Muted’ economy to ‘dent’ RMBS quality

According to Moody’s Investors Service, the performance of Australian residential mortgage-backed securities (RMBS) are set to “weaken moderately” in 2020, following improvements in the third quarter of 2019 (3Q19) when prime over 30-day arrears fell from 1.67 per cent to 1.57 per cent.

Moody’s has claimed that a rise in mortgage delinquencies would be triggered by Australia’s “muted economic environment”, record levels of household debt, and the conversion of interest-only home loans to principal and interest.

The ratings agency has downgraded its real GDP growth forecast for 2020, from 2.5 per cent to 2 per cent – this is higher than the 2 per cent growth recorded in 2019 but well below growth of 2.7 per cent in 2017.

However, Moody’s noted that upward pressure on arrears rates would be offset by low interest rates and the rebound in the residential property prices, which would reduce the number of mortgage-holders in negative equity.

An additional cut to the cash rate will likely place further downward pressure on interest rates.

The Reserve Bank of Australia (RBA) is expected to lower the cash rate for the fourth time in February when its monetary policy board next meets.

Shane Oliver, chief economist at AMP Capital, is expecting back-to-back cuts in February and March, which would take the cash rate to 0.25 per cent.

Further, the latest Home Value Index, released by property analytics company CoreLogic, revealed that the value of properties sold across Australia in the month ending 30 November 2019 grew by 1.7 per cent.

According to CoreLogic, there have now been five consecutive increases in the national index, with the November report showing the largest monthly gain in the national index since 2003 and the first positive annual growth (at 0.1 per cent over the past 12 months) since April 2018.

As a result, Moody’s observed: “Moody’s expects most mortgage borrowers will be able to continue meeting mortgage repayments at Moody’s forecast level of economic growth and unemployment, which means delinquencies will remain low overall.”

[Related: Arrears rates pose little risk to financial stability]