High values are not a sign of a bubble
San Francisco, CA -- (SBWIRE) -- 10/08/2012 -- Despite high housing prices, Australia’s property market is not a bubble waiting to burst, one analyst says.
David Bassanese of The Australian Financial Review also offers some reassurances about the nation’s leading banks.
Housing prices might be high, but they are not overvalued to such a degree that would lead to a price collapse, Bassanese writes. And although banks might be affected by real estate losses, the sector is stable enough to weather such as storm.
Australian home prices relative to income are not unusual when viewed in an international perspective, and Australia’s urban lifestyle has led to big land premiums. The largest chunk of household debt is held by people with good income, and mortgage strain is limited.
In fact, Bassanese forecasts a 10% to 15% increase in housing prices across the nation over the next year if the Reserve Bank of Australia reduces interest rates.
And if the property market did plunge, Australia’s biggest banks likely would be able to absorb a 30% drop in prices without having to raise significant capital, Bassanese writes. A recent report by Moody’s found that the big banks had healthy amounts of capital and that their loan books contained high credit quality.
If housing prices did fall 30%, only 1.4% of major bank home loans would be write-offs, according to Moody’s.
The Australian Prudential Regulation Authority’s outlook is similar to Moody’s. According to the authority, a 25% to 30% drop in the housing market would cut the tier 1 capital ratio of the biggest banks by only 3.1 percentage points.
Local banks maintain about 10% of assets in safe “tier 1” capital – that’s much more than the 4% required.
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