Home > Best assets to sell > Australian housing bubble about to be pricked by Fitch

Australian housing bubble about to be pricked by Fitch

The Australian housing market has been in a dreamland Ponzi bubble for 30 years.  The leverage has been astonishing.  The debt levels gigantic.  Prices have to come down around 40% to be sustainable, viable and functional.

What would that do to our banks?

Fitch is about to tell us.

AUSTRALIAN banks face fresh scrutiny over their exposure to the frothy housing market, with a key ratings agency planning a stress test to assess what sort of impact a sudden collapse in property prices would have on their lending books.

Ratings agency Fitch will run several shock scenarios ranging from mild to severe. In the worst-case scenario, Fitch will assess what is likely to happen to bank ratings if mortgage defaults rise as much as 8 per cent and property prices fall a hefty 40 per cent.

The results will also be used to assess implications for mortgage-backed bonds sold by banks and other lenders.

The Reserve Bank will this morning provide its half-yearly financial stability review, with the health of the residential property market likely to come under focus.

For months, Australian banks and analysts have been debating whether the property market is starting to look like a bubble, but details of the Fitch stress test were enough to spook investors, with bank shares taking a sudden negative turn yesterday afternoon.

Shares in Commonwealth Bank and Westpac, which have the largest exposure to residential property, yesterday closed down 1 per cent and 1.3 per cent respectively.

Fitch’s managing director for Australia, Ben McCarthy, said the ratings agency had received ”numerous inquiries” from investors about the sustainability of Australian residential property prices and the possible impacts of a correction.

“While over the short-to-medium term, a downturn is not Fitch’s central expectation, the agency is performing its stress test exercise on ratings impact under the hypothesis of an imminent housing market correction.”

Australia’s capital city home prices have risen 41 per cent since June 2006, on official Australian Bureau of Statistics data. Over the same period, prices plunged in the US, Britain, Ireland and Spain.

With an estimated 60 per cent of Australian banks’ loan books secured by residential property, international investors have questioned the sustainability of house prices.

Commonwealth Bank chief executive Ralph Norris has recently embarked on an international roadshow aimed at heading off concerns that the Australian property market is behaving like a bubble.

CLSA analyst Brian Johnson is a supporter of the bubble thesis, warning prices could fall if interest rates move higher later this year. He has said the first-home buyer segment is particularly vulnerable.

Hedge funds have also been circling bank stocks, betting the market was overvalued and a collapse in prices would cause steep losses for banks.

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