Yeah… Oz Banks are safe !! In lah lah land.

Today we note that Fitch is claiming that although they don’t believe it , it is ok that housing is in a bubble in OZ, because even in the worst case scenario Oz banks would be fine.

A 40 percent tumble in Australian house prices and a home loan default rate of 8 percent would be “manageable” for the nation’s banks and mortgage insurers, Fitch Ratings said.

Banks would see a maximum A$10 billion ($9.9 billion) of losses in the third year of a severe mortgage stress scenario and mortgage insurers would lose a little more than A$7 billion, John Miles and John Birch, directors for financial institutions at Fitch, said at a briefing in Sydney today. The findings are the preliminary results of a stress test announced last month.

We have no way of verifying these numbers, but given the US and Japanese experience we find them very hard to believe. As we commented the other day according to Credit Suisse Australia currently has $US1.36 Trillion in private debt. Fitch are claiming that in a worst case scenario banks would see losses of only 0.007% of this amount and insurers 0.005% in the third year. We don’t know about you, but those amounts seem stunningly low.

More amusingly the commonwealth bank, the most trustworthy of banks , did its own test.

Commonwealth Bank, which did its own stress test, said last month that under a “high-stress scenario,” with interest rates at 14 percent, unemployment at 10 percent and property values down 30 percent, it would see losses of A$740 million, or 0.2 percent of its total book, not including additional insured losses.

So in the worse case scenario CBA can dream up they believe they would only make losses equivalent to 1400 median Sydney houses. In a country with 9 million homes, and a government driven demand bubble less than 1 year old, we find this number very hard to believe.

Again we think someone in these agencies needs to take a long hard look at the US, Japan , Spain or Ireland to create a realistic model of the economic fallout from a debt driven housing collapse.

These numbers don’t assure us; we once again are worried that this is a grade 1 primary school level attempt by vested interests to claim there is no problem.

However lets hope they are correct, because it is becoming apparent that “investors” are better off with a term deposit, and the greed of the shareholders is starting to pressure bank policy.

Powerful shareholders are losing patience with the major banks for “talking the talk” but failing to combat mounting funding costs by hiking mortgage rates. Key shareholders are putting pressure on banking bosses to match their mantra with action and lift borrowing rates regardless of the deluge of bad publicity it would provoke

Talk about cutting off your nose to spite your face. Safe as houses? Only in lah lah land.

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  1. It is a simple calculation to work out that you may full well be better off with a term deposit. Rental yields are at 3.5% (excluding costs), interest rates 6.59%. This equates to a loss of 3.09% on an interest only loan. If you ASSUME houses increase by 10% per year then you only make 6.91% (excluding stamp duty, agency fees, repairs, etc) which is not that far off a term deposit.

    That is a VERY simple calculation and generous to housing speculators.

    (Fixed for spelling)