Ratings agency Standard and Poor's has published its annual analysis of the Australian housing market. The context of this report is primarily to assess the collateral pools underlying the Australian and NZ residential mortgage backed securities that S&P rates. Overall, the ratings agency is upbeat on many of factors influencing the RMBS sector. "A prolonged period of low interest rates has assisted with debt serviceability, particularly against a backdrop of lower wage growth. We expect the most recent rate cut by the RBA to have a positive effect on arrears. However, the extent to which this can offset the effect of lower wage growth is still being worked out," the report notes in its introduction.  "Arrears remain below their decade-long average of 1.25 per cent, and even if they do continue to increase from these low levels, we do not expect this to translate into higher defaults in a current economic climate of relatively stable employment conditions." Other factors are also at play, such as the mix of mortgage products that may be pooled as RMBS collateral. "Discretionary variable-rate mortgages are the predominant loan type in Australia. Low-documentation-style loans now represent around 1 per cent of loans underlying RMBS transactions, resulting in an overall improvement in the credit quality of the Australian RMBS portfolio," S&P said.  Lending to investors has decreased since the introduction of regulatory limits on new investor lending for banks in late 2014 and accounts for around 25 per cent of loans underlying Australian RMBS transactions. The negative notes are less apparent in the S&P report, but include "growing concern over the large volume of new unit stock coming onto the market, in addition to the already-existing supply, particularly in inner-city postcodes. S&P said this was "more pronounced in Melbourne and Brisbane. The increase in supply of units, coming at a time of tightening in lending conditions, could raise settlement risk."  "This is of particular concern for off-the-plan developments, which have a lag between the contract being signed and final settlement. Property prices could be affected, particularly if new units coming up for settlement are in competition with existing supply.  "In the context of Australian RMBS, the geographic exposure across the entire portfolio to inner-city postcodes is minimal, at slightly more than one per cent. Furthermore, the weighted-average loan-to value ratio of the Australian RMBS portfolio of around 60 per cent means that most borrowers have built up a degree of insulation against any depreciation in property prices."