The extent of exposure to potential problems in the property market is a key issue for Australian bank shareholders.

Today’s Reserve Bank Report on Financial Stability canvasses the issue and provides some interesting insights.

Some of the key points were.

  • The large number of new apartments recently completed and currently under construction in many capital cities raises the risk of a marked over supply in some geographic areas.
  • It is foreseeable that the greatest impact will be in Brisbane and Melbourne. In these cities, the new supply will represent a far larger increase in dwelling stock than in Sydney. Vacancy rates are already higher in these cities than in Sydney.
  • The RBA believes banks are more likely to experience material losses on their development lending thanon mortgages.
  • Liason with industry sources points to concerns about the risk of failure to settle on off the plan purchases. The largest development losses can be on incomplete projects.
  • So far, off the plan settlement failures have been low but could become more widespread if apartment markets turn down.
  • It is difficult to quantify how big losses on developer loans might be. However, assuming loss levels equivalent to the GFC, they will remain fairly small. Bank losses on property are unlikely to approach the levels seen in places like Spain because Australia does not face the same kind of economic headwinds.
  • A large price fall would be required before the banks would experience sizeable losses on mortgages (as opposed to developer loans). Rapid price increases in recent years have increased borrowers equity

You can read the full (and relatively brief) report here http://www.rba.gov.au/publications/fsr/2016/oct/

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