The IMF recently published a report on Australian Housing based on information available up until Aug 2015. The first 20 pages highlight information on bank stress testing & stability ratios.
A few conclusions they draw about housing :-
- Price-to-income ratios have risen across all measures in Australia and are now near historic highs. However, international comparisons of price-to-income ratios suggest that Australia is broadly in line with comparator countries,
- Lower nominal and real interest rates and financial liberalization are key contributors to the strong increases in house prices over the past two decades. The various house price modelling approaches indicate that house prices are moderately stronger (in the range of 4-19 percent) than economic fundamentals would suggest.
- High prices reflect low supply.
- Housing supply does indeed seem to have grown significantly slower than demand, reducing (but not eliminating) concerns about overvaluation.
And their thoughts on the Australian banking system :-
- There are no signs of weakening lending standards or speculation.
- Mortgage lending has grown strongly, but lending standards seem largely to have been maintained.
- Asset quality remains strong.
- Mortgage buffers have increased.
- Debt is concentrated among high-income households.
- There is no sign of a generalized credit boom and estimates of credit gaps are small.
- While lending standards overall seem not to have loosened, the growing share of investor and interest only loans focused on the highly-buoyant Sydney market, is a pocket of concern.
- Households have large buffers, & household wealth vastly exceed debt.
- With low interest rates, households are building buffers, and the savings ratio remains high.
- Even if houses are overvalued, it doesn’t matter as banks can withstand a big fall.
On this last point, it is good to see the APRA clampdown on lenders is having the effect they wanted. APRA recently concluded a stress test of the Australian banking system, focused on housing. One scenario was a housing market decline, prompted by a sharp slowdown in China, where Australian GDP growth declines to -4 percent, unemployment increases to over 13 percent and house prices fall by a cumulative 40 percent. In such as extreme scenario they concluded that… the banking sector would remain solvent, but unlikely to function well.