S&P Global analyst says sector is well prepared for challenges ahead
Despite anticipated challenges, Australian structured finance is poised to face 2024 with resilience, according to S&P Global Ratings.
The credit rating agency’s 2024 Structured Finance Outlook noted the sector’s robust performance in terms of issuance and collateral so far, successfully navigating through a period marked by several interest rate hikes and ongoing cost-of-living pressures.
“Most households have demonstrated resilience despite the strains on their finances caused by back-to-back rate rises and persistent inflationary pressures. Household savings, spending reprioritisation, and low unemployment have saved the day,” stated Erin Kitson (pictured), S&P Global Ratings primary analyst. “Despite the challenges, arrears and losses across consumer asset classes have remained low, and ratings stable, with upgrades exceeding downgrades.
“We’re not out of the economic woods yet; we forecast unemployment to increase as the delayed effect of rate rises flows through the economy. This is unlikely to cause any material pressure for the structured finance sector, provided unemployment remains low.”
According to S&P Global, although the “higher for longer” interest rate policy may impact the affordability of new home loans, factors such as low unemployment rates and a resurgence in housing demand will ensure that mortgage lending volumes remain stable.
“Low, albeit rising, unemployment will keep defaults low, underpinning our stable outlook for the Australian structured finance sector,” the S&P analyst explained.
Additionally, expected structural changes within the automotive sector, coupled with the benefits of population growth, are likely to propel new issuance activity this year.
“Tailwinds, including the downstream effects of strong population growth, will create momentum on several fronts by increasing demand for consumer goods and housing,” Kitson added. “These tailwinds will help to offset the broader effects of dwindling savings, which have been eroded by rising interest rates and cost of-living pressures. The household saving ratio is 1.1% as of September 2023, a far cry from its pandemic peak of 24%.”
Structured finance transactions have also maintained low arrears rates, supported by a strong labour market, households’ savings buffers, and shifts in spending priorities. Moreover, modest increases in property values are providing homeowners with more flexibility to navigate financial challenges.
“Property price growth is still in play, but moderating, as affordability continues to be a major hurdle to many prospective homeowners,” Kitson said. “This is keeping a lid on demand, for now.
“While the cash rate is nearing its peak, we expect its decline to be gradual, keeping rates higher for longer. This will provide some relief to households, but a cautionary approach to household finances will still be a necessity for some as savings buffers are eroded.”
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