Aussie Housing Risk No Deterrent as Mortgage Bond Sales Boom
Aussie Housing Risks No Deterrent as Mortgage Bond Sales Climb
(Bloomberg) -- Investors are lapping up mortgage bonds in Australia even as regulators and credit assessors step up their warnings about risks from the nation’s housing market.
New residential mortgage-backed securities issuance has more than doubled so far this year to A$10.5 billion ($7.8 billion) from A$5.1 billion a year earlier, data compiled by Bloomberg show. More than half of the issuance has been fueled by non-bank lenders. Those firms have fewer funding options compared with major Australian banks, which have been favoring unsecuritized debt at a time when costs are close to historical lows.
The surging sales come as Australians’ private debt skyrockets to an average 189 percent of annual household income, making citizens Down Under some of the world’s most indebted after binging on more than A$1 trillion of mortgages amid a housing boom. Soaring home prices in Sydney and Melbourne have stoked concern from politicians to central bankers, leading Treasurer Scott Morrison to extend regulators’ powers to apply controls to the non-bank lending sector.
“There’s a risk of a downturn in house prices. In our view, the market is extremely stretched,” said Matthew Peter, chief economist of Queensland-based asset manager QIC Ltd. As demand for loans rise, riskier borrowers will increasingly turn to non-bank lenders, leaving RMBS investors exposed to “a burgeoning risk to the financial system that’s coming potentially through this shadow banking source,” he said.
S&P Global Ratings said Australian financial institutions face an “increased risk of a sharp correction in property prices” which would lead to a “significant rise in credit losses,” according to a May 22 statement. The credit assessor, which affirmed the big four banks’ ratings while lowering the scores of 23 of the nation’s finance companies, said last week that Australia’s top AAA grade will only rest on a firm footing once there’s a “meaningful moderation” in housing and credit.
Still, Fitch Ratings expects pressures in the housing market to remain manageable and that it would take a “significant rise” in unemployment or interest rates to cause meaningful losses on mortgage lending. For now, mortgage bond issuance is rising as investors seek avenues for their funds.
“It’s very much a demand-driven phenomenon,” said Peter Riedel, finance chief of non-bank lender Liberty Financial Pty, adding that fund managers in particular need to put “capital to work in an environment where cash isn’t giving you any return at all.”
Investment managers such as Kapstream Capital in Sydney are attracted to RMBS because their credit spreads currently have “more juice” than senior unsecured bank debt, according to money manager Raymond Lee. While mortgage arrears have been climbing, they’re ticking up from a low base, and sound quality loans coupled with tighter lending practices since the financial crisis provide comfort to investors, he said. The number of delinquent housing loans underlying Australian prime RMBS rose to 1.16 percent in March from 1.13 percent a year earlier, according to S&P.
The top tranches of RMBS, which constitute the bulk of issuance, carry the highest credit ratings. “We’re cautious about the housing market but we do not foresee a significant move downward in house prices in the short term,” said Lee at Kapstream. “If anything it’ll probably remain stable.”
Cheaper Funding
The falling cost of issuing RMBS has also been driving the spike in transactions, according to Martin Jacques, the head of asset-backed securities strategy at Westpac Banking Corp. in Sydney. Many non-bank lenders who held back issuing in 2016 have returned to the market this year as spreads tightened, he said.
Recent issuance shows how costs have fallen this year. Liberty Financial in March priced a tranche of its top-rated RMBS with a 2.5-year weighted average life at a spread of 140 basis points over the bank bill swap rate. A tranche of similar securities were sold by the Melbourne-based lender at a gap of 165 points the same time last year, according to Bloomberg-compiled data.
Bendigo & Adelaide Bank Ltd. sold RMBS with a 2.9-year WAL at a 113 basis-point spread in March compared with 3.2-year WAL notes at 133 basis points over the bank bill swap rate August last year.
“The spreads are looking attractive relative to senior bank paper,” said Vivek Prabhu, head of fixed income at Perpetual Ltd. Stronger demand is reflected particularly in the secondary market where “liquidity has definitely improved” as investors put capital to work, he said.
--With assistance from Benjamin Purvis
To contact the reporters on this story: Ruth Liew in Sydney at rliew6@bloomberg.net, Emily Cadman in Sydney at ecadman2@bloomberg.net.
To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Marcus Wright at mwright115@bloomberg.net, Ken McCallum