Housing Puts Australian Banks At Risk

For years investors have been calling the Australian housing market a “bubble” yet the prices keep going higher. Is the other shoe about to drop in the Australian property market?

The Australian property market has been skyrocketing since 2012, up over 80% in Sydney while Melbourne has increased over 54%. In turn houses have become non affordable for many in Australia, as property values continue to outpace income growth. An average home in Sydney now costs more than 12 times the median income according to Demographia, a research firm.

To keep within the reach of buyers, the banks have loosened their lending standards. More than half of the loans on Australian banks consist of residential mortgages, accounting to $1.2 Trillion, a figure which has risen 47% in the past 5 years. Many analysts have stated the “new lending” has been dubious. Around one-third of the mortgage applications contain inaccurate information, resulting in almost $400 billion of so called liar loans, according to UBS.

Over 40% of these home buyers have been taking out interest only loans to keep their payment lower but this does not pay down any of the principal on the loan. The risk is inherent that borrowers will be unable to repay these loans. This works if the property values continue to rise. Once the market stops rising or slows, it will become much harder for stretched households to avoid going into default.

The Australian regulators are trying to reduce the number of interest only loans.  They face another difficulty. Tightening capital controls in China have slowed property demand in Australia, and soon the US market will be affected as well.  Australia, as well as the US, has been a very popular venue for Chinese buyers.  Australian property purchases from China has dropped 82% in the first half of 2017 according to Morgan Stanley, with Chinese investors having more and more complications getting their money out of the country.

Given the above information, it explains why Australian house prices are starting to slow. House prices were flat month-to-month in major cities for August.  This affects banks and their earnings. We are beginning to see the same signs in Southern California real estate as Australia.