Earlier this week, Australia’s Federal Treasurer Scott Morrison reassured foreign lenders that “Australian housing values, while high, are still ‘real’.”
“Safe as houses still broadly means something in Australia,”
He went on to say, “The rise in housing values has been driven principally by genuine economic forces of supply and demand, where mortgages are subject to full recourse finance, supported by a strong, stable and resilient banking system and world’s best practice credit standards.”
“Low or no doc loans that crippled US housing markets are a rarity in Australia. House price growth in Australia has and always will be a basic lesson in supply and demand.”
But the Reserve Bank of Australia might not be as convinced. On Friday, in an unusual move, it announced it will undertake its own “top down” stress test of Australia’s banking system. In Australia, stress tests are normally undertaken by the banking regulator, APRA.
The RBA explained APRA’s stress tests are normally “bottom down” and require individual banks to determine the impact of a common scenario. “These stress tests usually focus on the impact on individual institutions rather than risks to the system as a whole.”
The central bank’s top down approach will see the central bank make its own model and determine the impact to the entire financial system including if multiple banks become insolvent.
Australia’s banks depend on wholesale overseas funding – both short term and long term – for about 20 percent of their loan book. If financiers believe Morrison is bluffing them, they could reprice short term funding appropriate to the risk, forcing banks to raise rates out of cycle.
»No hard landing for Aussie housing: Treasurer Scott Morrison – The AFR, October 13th 2017.
»RBA to stress test banks as household debt and property investment remain key concerns, The ABC, October 13th 2017.
»Box D – Stress Testing at the Reserve Bank