Australian banks extremely vulnerable to housing collapse

by AB16 Jul 2013

Australia’s banks are dangerously vulnerable to any potential housing collapse, according to the latest Moody’s Analytics housing market research.

“The continued strong expansion in real estate loans—at least relative to other lending segments—has raised some eyebrows,” reads the report. “The Australian banking sector has the highest exposure to residential mortgages in the world…With the absence of any publicly supported securitization market—such as that provided by Fannie Mae and Freddie Mac in the U.S.—and a currently weak private securitization market, any new mortgage originations have to stay on banks’ books.”

Moody’s says the trend has been ‘exacerbated’ by changes to RBA rules meaning the central bank will accept residential mortgage-backed securities, which may be internally securitised as collateral for loans.

“The high degree of exposure to the domestic mortgage market raises many concerns. Recent experience has shown that house prices can fall significantly and trigger serious banking meltdowns.”

Furthermore, the research group argues that the chances of a housing collapse in Australia are ‘quite high’.

“When trends in Australian house prices are compared globally, the signs look worrying. House prices have increased for longer and faster than in many of the markets where prices cratered during the Great Recession.”