S&P drinks Kool Aid on Aussie mortgage risks

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Ratings agency, S&P, has released Panglossian analysis of Australia’s mortgage insurance industry, which it claims is facing low risks:

SYDNEY (S&P Global Ratings) Aug. 9, 2018–S&P Global Ratings today said it has maintained its low risk insurance industry and country risk assessment (IICRA) for the mortgage insurance sector in Australia (AAA/Negative/A-1+, unsolicited ratings). The low risk assessment is the second strongest on a six point scale. Our view recognizes the sector’s heightened product-related risks and challenging growth prospects in a very low Australian country risk setting (see “Australia Mortgage,” for the full report, published today). The low risk IICRA assessment is in line with our IICRA assessments on the Australian life, property and casualty, and health insurance sectors.

In our opinion, product risks for mortgage insurers remain elevated, reflecting the recent history of sustained house price appreciation across the Australian housing market. House prices in Australia’s major cities of Melbourne and Sydney have declined in the past 12 months, easing some risk attributes. We expect the house price declines in Australia’s largest cities to be orderly, while risks associated with slow wage growth and relatively high debt to income levels remain.

We anticipate that the mortgage insurance sector is unlikely to see material premium growth over the next one to two years. New mortgage insurance premiums have contracted in recent years on regulatory measures to constrain lending to particular market segments, such as investor and interest only loans, and also by tightened underwriting standards affecting the housing market more broadly.

We also expect the profitability of mortgage insurers to slightly moderate during 2018 from strong returns achieved in calendar years 2017 and 2016. However, our view of the sector is supported by high barriers to entry and the strength of Australia’s institutional framework, including its regulatory track record.

The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to [email protected]. Ratings information can also be found on S&P Global Ratings’ public website by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.

This report does not constitute a rating action.

For proper analysis of Australia’s mortgage risks see here, here and here.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.