Structured finance sector in Australia, New Zealand poised for ‘strong’ year

Resilient household sector and low unemployment will support the sector.

Australia and New Zealand are poised for a year of strong collateral performance and buoyant issuances, spelling a good 2025 for its structured finance sector.

Performance is underpinned by a “mostly resilient” household sector, low unemployment, and cautious optimism, S&P Global Ratings said in its report “2025 Structured Finance: Australia and New Zealand” released on 22 January 2025.

Strong demand for yield and increasing risk appetite will further expand lenders’ product horizons and funding options, the ratings agency said.

Notably, Australia’s “sophisticated and established” securitization landscape is fertile ground for exploring new products and transaction structures.

Competition is expected to ramp up in 2025 amidst interest rate cuts, which in turn will bolster demand for mortgages. However, this may also lead to deterioration of underwriting standards as lenders seek growth.

“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 reprioritization, and low unemployment have saved the day,” S&P said.
The rising property prices have also been a boon, giving a way out of financial pressure to borrowers at risk by enabling voluntary sale of properties. This reportedly kept losses low.

The biggest threat will be rising unemployment, which will elevate arrears and defaults.

Another threat are weather events such as wildfires, which could equate to higher catastrophe-related claims.

The expansion of development into higher risk areas can also increase losses, S&P said. Higher building replacement costs due to rising construction costs and more stringent building codes can lead to underinsurance, especially in said higher risk areas.