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Australia Housing Plunge, Rate Rises Won’t Hurt RMBS, Fitch Says

Australia’s residential mortgage-backed securities market is unlikely to see a cut in ratings if home prices plunge, unemployment doubles and interest rates surge, according to a stress test conducted by Fitch Ratings.

Under a moderate scenario -- in which home prices fall by 35 percent from current levels, the unemployment rate jumps to 11 percent and variable interest rates on mortgages climb to 12 percent from 6.9 percent -- 97.2 percent of AAA-rated RMBS would remain unchanged, Fitch said in an e-mailed report.

Australian house and apartment prices rose 0.6 percent in July from the prior month, when they climbed 1 percent, according to the RP Data-Rismark home value index released Aug. 1. The nation’s unemployment rate has remained in a range of 5 percent to 5.3 percent for the past 15 months, with the economy adding jobs in four of the past five months, prompting the central bank to keep interest rates on hold in July and August after 75 basis points of cuts in the prior two months.

Australia is “one of the more robust countries in the world,” Fitch analysts led by Ben Newey wrote in the report. Still, “potential downside risks to Australia come from the European crisis, which could lead to limited access to finance. High residential property prices and a dependence on relatively high commodity prices also have the potential to cause future stress in Australia.”

Some 71 percent of Australian 303 RMBS tranches have a AAA rating, while about 11 percent are rated AA and A, according to Fitch.

About 87 percent of BBB-rated RMBS and 92 percent of those a BB rating would be reduced to a distressed rating under the moderate scenario, Fitch said. All RMBS with a B rating -- 13 out of a total 303 -- would be cut, it said. BBB-rated securities account for 4.6 percent of the total, BB for 8.6 percent and B for 4.3 percent, it said.

A severe stress scenario, in which home prices halve from current levels, and unemployment and mortgage rates surge to 15 percent, is “extremely remote,” Fitch said.

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