Is Australia's Banking System Really At Risk From Rising House Prices?

Getty/Spencer Platt

The AFR this morning is running a line from former ABARE head and now professor at the ANU, Quentin Grafton, that Australia’s banks are becoming exposed from looser lending standards and the run-up in house prices.

Quoting from a soon to be delivered speech, the AFR says Professor Grafton will say:

Given that Australia’s major banks borrow about 30 to 40 per cent of their funds from offshore capital markets, any rapid fall in house prices would pose a dilemma for the big four banks and would likely result in an Australian-made credit crunch.

It’s a theory we have heard time and time again and one which simply reflects the reality of life in a current account deficit nation where the banks intermediate the desires of the community by borrowing from rest of the world to satisfy the domestic demand for credit.

But as RBA data has shown, and will likely show again at 11.30am today with the release of its quarterly Statement on Monetary Policy, Australian banks have changed the shape of their balance sheets and borrow more internally.

Equally, while banks might be loosening standards to sell more home loans, as Michael Blythe’s great slide shows the share of loans above 80% loan-to-valuation ratio might be rising at the moment, but it has remained static for 6 or 7 years, suggesting systemic leverage and potentially stress is not rising.

So as ever, predictions of Australian banking stress and a housing crash occur much more frequently than the actual event.

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