Most of us find it difficult to feel sorry for the big banks when they cry poor. But when their future security depends largely on the same thing that our own financial stability hinges on – our real estate markets – it’s a different story.
In an article in The Australian, Adrian Blundell-Wignall, deputy-director of Financial and Enterprise Affairs at the Paris-based Organisation for Economic Cooperation and Development said a slump in our nation’s property prices driven by a sharper slowdown in China’s growth is the biggest threat to our banks’ stability right now.
Banks hang in the balance
Blundell-Wignall warned that, with China’s economy continuing to teeter uncertainly between continued prosperity and a hard landing, Australian house prices were under threat from the resulting rise in unemployment should demand from its largest trading partner topple.
“That’s the major threat for the banks today: That Australia gets dragged down by the whole Europe-Asia-US issue and then unemployment starts to go up,” he told reporters at a lunch briefing.
“Whether (house) prices are too high or not depends on whether you’ve got a job or not. If you don’t have your job, you just can’t pay (your mortgage) and then you become a bad loan problem.”
The big four exposed
However they are also in a position of high exposure due to the $1 trillion-plus Australian mortgage market, which analysts believe is their potential Achilles heel.
Mortgages account for up to 15 per cent more of the loan book of Australia’s big four lenders than the average among their US peers, according to data from to the Federal Deposit Insurance Corp.
This is not surprising given that Australian house prices have risen to be some of the most expensive in the developed world, as demand for property has surged and our nation has continued to enjoy relative prosperity in the wake of our counterparts slumping into the economic doldrums.
On top of that, Credit Suisse reports that Australia’s average debt-to-income ratio has risen to 166 per cent – higher than the 123 per cent peak in the US in 2007, just ahead of the sub-prime mortgage crisis.
Top shelf prices take a tumble
Already rising unemployment among top-paid financial services professionals is being blamed for a house-price slump of more than 40 per cent in some of Sydney’s most exclusive suburbs, including Point Piper where prices tumbled by 41.8 per cent in the 12 months to April to a median of $1.025 million.
This dramatic fall, in what was up until recently the most expensive suburb in Australia, represents the largest median price decline across Sydney according to RP Data.
In fact house prices right across our nation’s more exclusive, high end suburbs have taken a dive recently, with Double Bay medians falling by 27.4 per cent during the year and 15 per cent in the past three months to a median sale price of $2.55m, while in the north-shore suburb of St Leonards, prices have decreased by more than a third, the data showed.
Nine out of 20 of the areas that recorded the largest falls in the year to April 2012 had average property values of more than $1m.
It’s interesting how the overseas experts see Australia’s glass as half empty, when the local experts see it as half full.
While the overseas commentators are still waiting for our property bubble to burst, all indicators are pointing to the market having bottomed out. In fact property values in our major capital cities have risen for the last 4 months in a row.
Despite China’s economic slowdown and the troubles in Europe our economy is ticking along nicely and the RBA is slowly stimulating our economy by lowering interest rates
As for our banks, they are in a much, much sounder position than they were in at the beginning of the GFC. Sure some of us are upset they haven’t passed on all the interest rate cuts, but our banks have been preparing themselves to handle any speed bumps in the road to recovery of the world economy.
Only recently Reserve Bank Governor Glenn Stevens reassured us that our property market is sound, affordability of housing is good and our banking system is sound.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.