DBRS on Italian Residential Mortgage
Performance of Italian RMBS has remained stable in recent years
DBRS released a commentary on DBRS providing on an overview of the Italian housing market and the factors shaping the residential mortgage-backed securities (RMBS) market.
Despite the Coronavirus Disease (COVID-19) pandemic and the Russian invasion of Ukraine, the Italian economy, its housing market and the performance of Italian RMBS have remained relatively stable. The recent trend of GDP growth and a relatively stable jobs market, influenced by government measures to contain the impact of the health emergency caused by the pandemic, have helped underpin domestic house prices in recent years, and the Italian economy continues to demonstrate a sound degree of resilience.
The reliance of Italy’s economy on gas imports makes it vulnerable to high energy prices and lower gas supply in the coming quarters, when the gas storage will have to be refilled. DBRS Morningstar does not rule out a modest recession in 2023, but long-lasting implications are expected to be limited as gas rationing, if any, is expected to be moderate (see "DBRS Morningstar Confirms Republic of Italy at BBB (high), Stable Trend" for more details).
With mortgage rates set to rise further and a moderate increase in the unemployment rate also expected in 2023, DBRS Morningstar anticipates some increase in mortgage arrears, albeit from a low level. However, DBRS Morningstar considers the risk of a house price shock to be low and expects the ratings on its Italian RMBS portfolio to remain stable.
Italian Economy Overview
Post-pandemic, the Italian economy was able to rebound rapidly thanks to a resilient manufacturing and construction sector, an expansionary fiscal policy, and the injection of sizeable European Union (EU) resources. Since September 2021, the government has implemented one of the largest support packages in the EU to counteract the energy crisis. However, the war in Ukraine, tighter monetary policy, weaker global demand, supply-side restrictions and persistently higher inflation will likely weigh on Italy's economic performance in the coming quarters.
DBRS Morningstar's baseline macroeconomic scenario for Italy anticipates a negative GDP growth rate of -0.1% in 2023, following an expected growth rate of 3.7% last year. This will feed through to unemployment, which is expected to rise by 0.4% in 2023 from an expected level of 8.1% in 2022.
House Prices
Historically, the Italian housing market has shown a low rate of growth since 2000, compared with other European countries. Contrary to most housing markets across Europe, the Italian market is not afflicted with undersupply, which is one of the factors that have kept house price growth at low levels in recent decades. Consequently, the level of affordability is currently more supportive for Italian households than for other European homebuyers, and DBRS Morningstar sees a lower risk of large house price corrections in the coming years. While house prices shot up in other European countries after 2015 (Exhibit 3), the Italian general house price index (HPI) proved to be more sluggish, declining moderately until 2019 and showing only slight signs of recovery thereafter.
Italian Mortgage Market
The origination of household lending for home purchases shows an upward trend in the last ten years, with an average quarterly increase of 3.2% since 2013, although this was interrupted between Q2 2019 and Q3 2020. In particular, 2020 was affected by the coronavirus pandemic. Since Q4 2020, the origination of new loans has recovered pace.
During the same period, the stock of residential mortgage loans subject to renegotiation, i.e. permitted variations to the loans' terms, has increased, representing 18.0% of all outstanding loans as of September 2022.
Nonperforming Loans
The nonperforming loans (NPL) ratio (NPL debt as a percentage of total outstanding debt) for Italian banks fell to 3.5% in September 2022, from a peak observed in September 2015 of 17.1%, largely driven by significant NPL disposal transactions executed in recent years.Breaking down the balance of NPLs into their principal components, the weight of unlikely-to-pay (UTP) exposures has increased over time, representing about 53% of the NPL ratio as of September 2022. In absolute terms, the balance of NPLs granted to households for home purchase is mostly concentrated in Lombardy and Lazio, being the mostly populated areas.In trying to derive a proxy for a breakdown of the NPL ratio at regional level, by considering long term loans granted to households for home purchase5, we observe that the weight of NPLs on total outstanding debt is greater in the southern regions and Umbria.
Italian RMBS Outlook
Different macroeconomic indicators show that Italy experienced a better-than-expected recovery from the coronavirus economic shock and registered a fiscal deficit lower than anticipated. Nevertheless, there is high uncertainty surrounding the duration and impact of the conflict in Ukraine, as well as from the ongoing energy crisis and the spike in inflation rates.
Despite this, house prices are still rising, and DBRS Morningstar believes that there is a low risk of a large correction in the Italian housing market, as past evidence demonstrates a high degree of stickiness in domestic house prices.
With mortgage rates rising and a moderate increase in unemployment expected in 2023, DBRS Morningstar expects some increase in the level of mortgage arrears, albeit from a low level. Overall, while mortgage performance is expected to somewhat deteriorate, DBRS Morningstar's ratings on Italian RMBS are expected to remain stable, also as a result of structural mitigants like credit enhancement and liquidity support.
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Link to the Report
https://www.dbrsmorningstar.com/research/408558