Concerns are mounting that Australia’s big banks are disregarding risk and may not be capitalised enough to withstand a conceivable property correction.
Today, the Australian Financial Review reported Sydney home prices are growing five-times faster than wages. Such rapid increases in property prices over one’s ability to service the mortgage has caused ratings agency Moody to warn the risks of mortgage defaults in Sydney and Melbourne is increasing.
According to Moody, a single breadwinner household in Sydney would be spending an “unsustainable” 70 per cent of their income on the mortgage. With interest rates at abnormal lows, levels not seen in decades, fear is starting to mount the risk of default and delinquency will multiply when interest rates return to more normal levels.
This view is one shared with the banking regulator, the Australian Prudential Regulatory Authority (APRA), who last year opened its macro-prudential tool kit and provided guidelines to the banks to stress test buyers with a minimum 7 per cent mortgage rate, providing borrowers a buffer for when rates return to normal.
The Australian Financial Review revealed last week (‘How National Australia Bank circumvents rules to stop a property bubble‘), National Australia Bank is not abiding by these guidelines for more risky property investors who currently own one or more investment properties and are seeking new mortgages to expand their portfolios. Rather, a confidential NAB mortgage calculator shows it is applying the current mortgage rate, which can be as low as 4.29 per cent.
This comes on top of earlier reports showing National Australia Bank has increased lending to property investors by 13 percent last year, when APRA said it would not like to see growth exceed 10 per cent – another macro-prudential measure.
The big banks imprudent desire to operate with razor thin capital to enhance super profits could be significantly impacted by Australia losing its coveted AAA credit rating, a result likely with further deterioration of the federal budget and a dysfunctional government. The Financial System Inquiry (FSI) chairman David Murray said today if the government lost its AAA rating, the downgrade would hit our banks who rely on foreign funds underwritten by the federal Treasury. Murray, CEO of the Commonwealth Bank of Australia between 1992 and 2005, holds the view our banks are under-capitalised and a growing risk to the economy as they lend excessively to our “housing casino”.
Robert Mead, PIMCO’s head of portfolio management in Australia has weighed support into the debate saying banks should raise more capital to protect against the potential fallout from over extended households. (‘PIMCO calls on banks to do their bit and raise capital‘)
Mead told Fairfax, “In five months since [the introduction of macro-prudential tools] we’ve seen a continuation of a strong property price rally in certain markets,”
With many of the banks ignoring APRA’s macro-prudential guidelines, Mead commented “These sorts of macro tools are important, but don’t appear to be working.”
“The way to reduce this risk is to have a banking system that is even more robust. Asking banks to raise more equity capital is a way to de-lever the system, and I would argue the long term benefit to the shareholder is that their bank becomes more resilient.”
The Murray FSI report last year published findings of a stress test conducted by APRA showing a mining downturn, rising unemployment and a housing correction “would be sufficient to render Australia’s major banks insolvent in the absence of further capital raising.” (‘Australian banks not the safest in the world – far from it.‘)
» David Murray says banks would be hit by AAA credit downgrade – The SMH, 28th April 2015.
» Risk of mortgage defaults rise in Sydney, Melbourne – Yahoo Finance/AAP, 27th April 2015.
» How National Australia Bank circumvents rules to stop a property bubble – The AFR, 23rd April 2015.
» Sydney home prices are growing five-times faster than wages – The AFR, 28 April 2015.
» PIMCO calls on banks to do their bit and raise capital – The Sydney Morning Herald, 28th April 2015.