Australian banks at risk to “fickle” and “modestly overvalued” housing sector: Moody’s economist

Anything other than an orderly correction in Australian house prices could spell trouble for Australia’s banks, an economist has warned.

Moody’s Analytics managing director and economist Tony Hughes says Australian housing “appears overvalued” and has warned of the experience in the US where the property downturn brought the
“country’s banks to their knees”.

Hughes tempered his remarks, telling the Australian Financial Review that his report showed Australian house prices appeared “modestly, but not excessively” overvalued.

However, he warned against complacency given that Australia’s banks have the heaviest weighting to the local property market via home loans than any other banking sector in the world.

Home loans make up nearly two-thirds of the total lending undertaken by Australian banks compared to an exposure of around 35% among American banks.

The latest APRA banking figures for May provide a stark reminder of the extent to which the big four banks dominate the mortgage lending landscape.

Top of the pile is the Commonwealth Bank with a mortgage book worth $320 billion followed by Westpac ($297 billion), NAB ($196 billion) and ANZ ($178 billion).

By comparison, the fifth biggest mortgage lender, ING Direct, has a home loan book worth only $37 billion.

Hughes warns that this high exposure to home lending represents a “major concentration risk for banks and the Aussie economy”.

And while local analysts remain complacent in his view about this concentration risk, Hughes says international investors are concerned.

“When trends in Australian house prices are compared globally, the signs look worrying,” Hughes says.