Aussie housing risk no deterrent as mortgage bond sales boom

[SYDNEY] 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 (S$10.8 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 per cent 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."

BLOOMBERG