There is a “speculative element” to recent house price rises which is leaving the Australian banking system at an increased level of risk, according to Fitch Ratings.
Releasing a report on Australian Banks this morning titled, Australian Banking System’s Mortgage Exposure, Fitch said:
Rapid price appreciation since 2012 has been due to a combination of low interest rates and increased investor risk appetite, among other factors. National home prices have risen 16% since the recent cyclical trough in 3Q12, and as much as 25% in the largest market, Sydney. As a result, Australian home prices appear overvalued relative to historical averages, and a continuation of the recent price rises is unsustainable without commensurate growth in incomes – which is unlikely, considering the uncertainties surrounding the economic outlook.
The report suggests that the banks are taking more risk on their balance sheets based on the increased lending for owner-occupied interest only loans and the overall level of investment lending.
“These trends could, in turn, increase the risk profile of banks’ mortgage assets in the event of adverse market movements such as higher interest rates and a general macroeconomic slowdown,” the report highlights.
What is really interesting about this analysis, and something that Commonwealth Bank CEO Ian Narev referred to as the CBA’s own analysis in his speech to the American Chamber of Commerce in Australia at lunch-time today, is that Fitch says there is actually little risk in Australian Banking’s mortgage books.
Rather it is the secondary impacts of mortgage stress which are the big risk to the economy and the banking system.
Fitch maintains that the risks of unmanageable losses in the mortgage portfolios of major banks are low. However, it is the indirect effect on non-housing loans that pose the greater risks to banks in the event of a significant housing downturn. The negative impact on consumer confidence, consumption and investment from such a downturn would almost certainly feed into weakening commercial credit quality. In such an event, commercial loan losses would be likely to dwarf those from the mortgage portfolio.
So there you have it – Fitch is alert, but clearly not alarmed.