Big banks in Australia can withstand the severe downturn in the housing market but their reliance on offshore wholesale borrowing markets for financing makes them vulnerable, according to a new assessment.
Global credit ratings agency Fitch said home prices in Australia “look high” compared to the US and Europe and near-term downturn is unexpected in the market, given its strong growth forecast.
The agency noted that the housing market had some vulnerability, especially the country’s household debt-to-disposable income ratio. If any fall in the housing market occurs, the banking system has a “substantial capacity” to manage the slump.
The findings came on the back of a similar stress test conducted by the Australian Prudential Regulation Authority, which showed that Australia’s banks could survive an economic downturn that was significantly worse than that in the early 1990s.
“Even in a severe downturn, gross losses incurred by the four major banks in their mortgage portfolios would be manageable,” said John Miles, Senior Director at Fitch. “Of more concern would be the broader state of the economy, should such a downturn ever occur, and the impact this would have on commercial loans.”