Commercial real estate and property development 'vectors of distress'
Banking industry regulators are spending more time watching for emerging risks in the commercial real estate and property development markets than they are in the household sector.Australian Prudential Regulation Authority executive general manager policy and supervisory support division, Charles Littrell, said APRA was "dialling up" its investigation of systemic issues in those markets."The things that go wrong are commercial real estate, small business and then entrepreneurial corporates," he said.Littrell, who was speaking at the Council for International Finance and Regulation's banking research showcase in Sydney yesterday, said APRA was also worried about the level of concentration in the banking system, where four banks with similar business models have an 80 per cent share of mortgage lending and other retail banking.Another speaker was the head of the Reserve Bank financial stability department Luci Ellis, who said: "Housing is important because it is big, not because it is risky. The things that have tended to be causes in a crisis are commercial real estate and property development."These are the vectors of distress. What we need to see in the research is more on commercial real estate and property development."Ellis and Littrell agreed that the combination of historically low interest rates and high property valuations was unprecedented and suggested a need for caution."We are in a situation where we have not been before. That makes us more conservative in our settings," Littrell said.As to the ongoing debate about the appropriate level of capital that banks should hold, Littrell said: "It is much easier to strengthen a strong banking system than a weak banking system. Now is a good time for banks to strengthen their balance sheets."But Littrell said he was not convinced by arguments that banks should hold very high levels of capital (some commentators have recommended capital adequacy ratios of 25 per cent)."People who push for very high bank capital forget that that was how it used to work and there were still banking crises every seven years or so."Banks can always take more risk than you can make them hold capital."