Moody’s: Rising house prices provides buffer for falling prices

From Moody’s Investors Services:

Equity cushion will absorb losses if loans default: Rising housing prices have added an average of 14 percentage points of equity to the mortgage loans in the portfolio of Australian residential mortgage-backed securities (RMBS) that we rate. This “additional equity cushion” provides a buffer to absorb losses if mortgages default, which is positive for Australian RMBS.

Equity cushion varies markedly across Australian states: The additional equity cushion differs markedly between mortgages from different Australian states and territories, reflecting divergent housing price performance in different regions. As a result of strong housing price growth in the respective capital cities of Sydney and Melbourne, mortgages in the RMBS portfolio from New South Wales (NSW) and Victoria have the highest additional equity cushions among Australian states. In Western Australia — where housing prices have come under pressure owing to the downturn in the state’s resources sector – the additional equity cushion is lower.

Some mining regions have negative equity, but RMBS exposure is low: In some regions with exposure to the mining sector, the additional equity cushion has been eroded by housing price declines and mortgages now have negative equity attributable to housing prices. However, RMBS exposure to regions where housing prices have declined is small. As such, the portfolios of all the RMBS that we rate have additional equity cushions attributable to housing price appreciation.

So rising home prices in Sydney and Melbourne has provided a buffer for falling prices! Great. But wouldn’t the fact that these two markets are now so far above fair value – due to said rising prices – also mean that they are also much more susceptible to falling prices when the tide turns (i.e. a type of mean reversion)?