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 annualised 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.
Sydney properties, however, remain slightly expensive on this measure – with median sales prices currently at 8.6 times the annualised weekly full-time earnings for NSW workers.
That is only slightly above the 10-year average of 8.4 times and significantly higher than the bottom quartile measure of 7.4 times. In other words house prices have been below 7.4 times earnings, 25 per cent of the time over the last 10 years.
In Melbourne, the median sales price-earnings multiple is 7.4 times, in line with the five-year average but above the 10-year average of 7.1 times and well below the bottom quartile level of 6.6 times.
House prices tend to bear a close relationship with the earnings generated by workers in the region as rising or falling incomes can either increase or reduce the ability to service a mortgage or pay a higher rent.
Yet for five years weekly full-time earnings, adjusted for inflation, have flat-lined, while house prices have exhibited strong gains, until mid-2017.
This resulted in an increase in the multiple of house prices relative to earnings.
In the eight capital cities, the price-earnings ratio increased from 6.7 times in 2014 to as high as 7.5 times before retracing to 10-year average levels.
In Sydney, the ratio reached as high as 10.5 times in June 2017 before retracting toward the 10-year average of 8.5 times.
But NAB analysts are taking comfort from the fact that these price-earnings ratios have fallen by much further in the past, and mortgage-backed securities have proved resilient.
In Sydney, the ratio of median house price sales to full-time earnings fell to 6.5 times in 2009 at a time when mortgage rates were comparable to current levels and the state unemployment rate exceeded 6 per cent (versus 4 per cent currently).
Meanwhile in Melbourne the property price-earnings ratio has been steadily rising from 6 times in March 2009 when the state unemployment rate was about 6 per cent (versus about 4.5 per cent currently).