A sharp fall in house prices should not trouble mortgage bond investors but further price declines in Sydney and Melbourne are likely, according to securitization analysts that have tracked house prices relative to the earnings of full-time workers.
The analysis prepared by National Australia Bank’s corporate finance staff for clients showed that while nationwide house prices were in line with average multiples of full-time earnings, Sydney and Melbourne prices would need to fall further to correct to what is considered an average level.
“With price-earnings multiples in the major Sydney and Melbourne markets still above their 10-year averages and comfortably above their bottom 25 per cent quartile levels, further declines should probably be expected,” National Australia Bank director Ken Hanton said in a note to clients.
“However, there is still some way to go before these multiples fall outside the ranges that have existed in the post global financial crisis period.”
The residential mortgage-backed securities (RMBS) market, in which home loans are packaged up into trusts, and sold to fixed income investors is a vital source of financing for non-bank and regional lenders but it is also tapped occasionally by the major banks.
While RMBS funding costs have fluctuated over the last 10 years, the assets backing the bonds have performed strongly as arrears have remained low.
Investors in Australian RMBS have yet to experience a loss of capital, and while Core Logic data showed house prices have fallen by the fastest pace in over 10 years, NAB analysts still see no reason to be concerned.
That is because prices in the major cities would still need to fall significantly relative to earnings to hit levels experienced during the global financial crisis, where mortgage bonds held up.
On a nationwide basis, NAB said dwellings are valued at a multiple of 5.8 times annualized weekly full-time earnings. That is actually below the five- and 10-year average measure but above the 20-year average of 5.5 times.