Structural headwinds in the property market could result in heightened risks to the Australian mortgage insurance industry, says a report by S&P Global Ratings.
In a new report titled “Insurance Industry and Country Risk Assessment: Australia Mortgage” and cited by Australian Broker, S&P says that encroaching macroeconomic risks such as rising house prices and a growing ratio of household debt to disposable income have the potential to cause volatility in the mortgage insurance industry.
If these factors cause a sharp correction in house prices, this could create a significant rise in credit losses.
“This increases the risk of material adverse claims experience for lenders' mortgage insurers in Australia,” S&P said.
However, the agency’s base case scenario assumed that current and future actions by the government and regulators could lessen the impact of this scenario.
For the short term, analysts predict that an “orderly correction” of house prices in Western Australia and Queensland will continue throughout the rest of the year.
“While the latter could increase insurance claims originating from these states, it is unlikely to pose a significant challenge to the credit profiles of insurers that offer lenders' mortgage insurance (LMI).”
Furthermore, S&P predicts that employment levels – which can drive claims frequency for the sector – are likely to improve.
One pressure point highlighted by S&P is continued restrictions on lending practices put in place by the APRA.
“We expect these regulatory actions to weaken LMI premium demand, absent a structural change to the product or market,” analysts said.
As well as reduced lender risk appetite in the high loan-to- value ratio segment, S&P warns that outside factors could further drive market contractions as they have affected the market in the past.
“Other contributing factors include a major Australian bank shifting part of its mortgage insurance requirements offshore and, more recently, a material home lender choosing to retain the risk instead of purchasing insurance.”
As a result of these factors, S&P predicts a moderation in return on equity within the mortgage insurance sector over the next two to three years.