Credit Suisse has expressed concerns about the Australian Banking Sector in its latest research report. It fears job cuts, payment shocks and declining house prices could cause downside risks to earnings and dividends as Australia’s households continue to de-leverage.
According to the research, leveraged investors are struggling to make money with low rental yields of approximately 3.2 per cent, but mortgage rates of 6.4 per cent. As a result, most investors can only afford to be 50 per cent geared, but actual data shows most investors are 60+ per cent geared and many on interest only.
“Essentially, investors are subsidising losses on their property portfolios out of wages, in the hope of future capital gains. But their ability to keep doing this will be stretched if house prices do not rise, and if payment shocks hit.”
As they are already finding it hard to make money from residential property, it does not make sense for current investors to increase leverage and exposure to property. “Therefore, there is a distinct lack of momentum in the market to keep the bubble going.”
Credit Suisse believes house prices are between 20 to 40 per cent overvalued and as potential buyers are concerned with affordability and job losses, “demand is extremely low.”
“If demand remains low relative to supply, house prices could fall substantially.”
It also believes “Households are under more financial strain than the official data suggest” and the “RBA is now too far behind the curve to prevent a major slowdown in 2013.”
Interestingly, it believes if the RBA were to take deep, pre-emptive cuts to the cash target rate (1.5%), the end result may “not have to end disastrously”, but it believes the RBA seems unsympathetic to mortgagees. It is unclear what exposure Credit Suisse has to the Australian residential property market.
But with so much of the mainstream media, the property industry and governments peddling real estate as a sure bet, the RBA does not want to refuel a new bubble built on abnormally low interest rates.