Perception of Australian housing price bubble keeping US RMBS investors away: Pimco
The perception that the Australian housing market is in a “serious bubble” means US investors are wary of funding residential mortgage-backed securities (RMBS) issued by the major banks, according to Peter Dorrian, head of global wealth management at the Australian arm of investment firm Pimco.
According to Dorrian there is “quite a wide difference” of opinion between Australian investors’ perceptions of Australian banks and overseas investors’ opinion of them.
“I have a US colleague with me at the moment and he says Australia has the most overvalued housing market in the world and that is has a serious bubble,” Dorrian told Business Spectator, while stressing that this was not necessarily Pimco’s view.
“There is a view that the big four banks are so tightly levered into the domestic property market that if there was to be a more severe correction of the Australian property market it would have an impact on their balance sheets,” he says.
This is despite the average loan-to-valuation ratio on RMBS portfolios being around the 50% mark, meaning it would require a significant fall in house prices to have a severe impact on the banks’ balance sheets.
“But its perception that counts at the moment,” Dorrian says.
His comments come as Australia’s sixth biggest mortgage lender, ING Direct, raised $800 million in the first deal of the year for the Australian RMBS market but limited interest from overseas investors.
“Investors were primarily local,” David Breen, head of corporate affairs at ING Direct told Property Observer with insurance companies, fund managers and superannuation funds among those that invested in this issuance.
The ING Direct issue was priced at 145 points over the one month bank bill swap rate (BBSW) – the benchmark rate at which banks will lend to each other.
RMBS, where mortgages are bundled together and sold to institutional investors, was a very cheap form of wholesale funding in the decade prior to the GFC, accounting for 23% of all bank mortgage funding at its peak.
However the market collapsed in the two years following the sub-prime crisis in the US, falling 41% from $204 billion to $120 billion as overseas investors’ appetite for the product shrank.
It has since recovered some ground, but is now a much more expensive form of funding, with little appeal for foreign investors.
Aside from investor wariness because of housing concerns, Dorrian says Australian banks are also facing a lot of competition from other international banks for wholesale funding.