Australian bank risks rise in tandem with house prices - Fitch
Fitch Ratings juggles its messages telling Australia's growth story in a banking context.
In a report released yesterday, Fitch said low wage growth was driving "a stabilisation in household debt levels as wage increases ease and unemployment rises."
A slowing of housing credit growth was the expected result of these trends, it said.
The carnival that is the property bubble received due attention in the report.
Noting the significant increase in housing prices amid a substantial escalation in investor and interest-only mortgage loans in 2013 and 2014, Fitch said these features had increased risk factors in the Australian banking system.
"Risks in the Australian banking system would rise if house prices were to continue their strong growth," Fitch warned.
"Australian home prices appear overvalued relative to historical averages, and a continuation of the recent price rises is unsustainable without commensurate growth in incomes - which is unlikely, considering the uncertainties surrounding the economic outlook."
Fitch said strong growth in investor and interest-only loans, and indications that owner-occupiers had been increasingly borrowing on interest-only terms, suggested "a rising risk appetite on the part of the banks."
"Fitch's analysis indicates that the risk for investment mortgages is higher in the case of owner-occupied mortgages, and suggests a speculative element to recent house-price appreciation. The rise in interest-only loans also raises the susceptibility of borrowers to a weakening in market conditions owing to the slower accumulation of borrowers' equity relative to more traditional principal-and-interest loans," it said.
However, Fitch concluded that the possibility of significant losses in the housing books remained small, saying it believed the "home market should moderate alongside a slowing economy and reduced upward pressures on wages."
The interest-only segment of the market may be lively, Fitch observed, but added that, outside of the investor and interest-only segment of the market, credit standards had been "maintained, or even strengthened."
"Fitch maintains that the risks of unmanageable losses in the mortgage portfolios of major banks are low," the ratings agency said.
"The mortgage portfolios are well-seasoned and benefit from relatively conservatively underwriting. Losses would be more likely to emerge from commercial loan portfolios in a significant downturn."