A 20 per cent crash in local property values would not dent most AAA-rated Australian mortgage bonds, says Standard & Poor's.
Standard & Poor's cited the "particularly fast pay-down profile of Australian mortgages" as one of the reasons for the stability of Australian residential mortgage-backed securities (RMBS), pools of home loans that are bundled-up and sold to investors who receive regular payments from the mortgages.
The research note "How Resilient Are Australian RMBS To A Decline In Property Prices?", from credit analysts led by Erin Kitson, says a 20 per cent fall in property prices would only affect 3.5 per cent of AAA-rated notes.
"Property prices in Australia have been rising almost uninterrupted for two decades, thanks to a strong cultural desire for home ownership and a lack of supply," Ms Kitson said.
"But with property prices at record highs and interest rates at a record low, regulatory bodies in Australia are focusing on lending standards in a bid to safeguard the nation's financial system," she said.
Standard & Poor's said low rates had helped fuel increased debt, and with higher levels of leverage, home loan borrowers were vulnerable to a rapid deterioration of economic conditions as well as a sharp and prolonged rise in unemployment.
"The financial losses would be worse if property prices were to fall sharply at the same time," Ms Kitson said.
"[But] we believe the majority of prime RMBS transactions are well placed to withstand a moderate decline in property prices, provided that unemployment does not materially increase."
Local RMBS stability was supported by lenders' mortgage insurance coverage, the sequential-payment amortisation structures of the bond transactions, geographic diversity of the securities, and an overall improvement in portfolio creditworthiness, "particularly the fast pay-down profile of Australian mortgages and associated build up in borrowers' equity".
"Australian regulators' focus on prudent lending standards while interest rates and unemployment are low provides an important safeguard, in our opinion," Ms Kitson added.