» Moderate overall exposure to regions with large supply of new apartments: The supply of newly-built apartments is set to increase significantly in some regions in Australia – referred to as “high-density regions” in this report – over the next two years, pressuring both real estate prices and rental returns from existing properties – particularly apartments – in these areas. Such a development will in turn raise the risk for residential mortgage-backed securities (RMBS) exposed to these regions. In the case of the portfolio of Australian RMBS that we rate, there is a moderate overall exposure (5.6%) to mortgages on apartments in high-density regions. Therefore, we believe the surge in the supply of new apartments entails a moderate increase in risk for the Australian RMBS portfolio generally.
» Risk varies between deals: Some deals have higher exposure (up to 14.6%), while others have zero exposure. The risk posed to RMBS is mitigated by the level of equity that is available to absorb losses if borrowers default, as highlighted by the low weighted average loan-to-value (LTV) ratio of mortgages on apartments in high-density regions. The current LTV is 62.4%, and it falls to 47.4% after consideration of apartment price appreciation.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
