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.
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.
Disclaimer: The content on this blog is the opinion of the author only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author has no position in any company or advertiser reference unless explicitly specified. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult someone who claims to have a qualification before making any investment decisions.