Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

House price declines not fatal for Australian banks

Glenn Freeman  |  11 Apr 2018Text size  Decrease  Increase  |  
Email to Friend

Residential property prices are on their way down across Australia's largest cities, particularly in the east coast hubs of Sydney and Melbourne.

There's been no shortage of commentary about this, with commentators having been calling a downturn for at least the last decade. What is unusual, however, is that these falls are not correlated with an interest rate rise. AMP Capital chief economist Shane Oliver notes property price downturns are usually preceded by significant interest rate increases--though the Reserve Bank of Australia recently left rates on hold.

Oliver believes there is good reason to be concerned, pointing out that real capital city houses are 27 per cent above their long-term trend, and are high relative to OECD countries.

The high ration of household debt-to-income add to his concern, along with the deterioration in lending standards that saw interest-only loans account for around 45 per cent of home loans in 2015.

The surge in supply of apartments is another concern, particularly in Sydney.
While Australia's big four banks are among some of the most-exposed businesses to a potential housing price crash, Morningstar banks analyst David Ellis isn't overly concerned.
In a research note early last month, he says "we make no changes to our fair value estimates for the four wide-moat major banks".

"At current prices, Westpac Banking Corporation and Commonwealth Bank of Australia are undervalued, trading 13 per cent and 11 per cent respectively below our valuations.


"National Australia Bank and Australia and New Zealand Banking Group are trading close to our valuations at 6 per cent and 4 per cent, respectively, below our valuations," he says.

Australian Prudential Regulation Authority's banking statistics for January 2018 showed Australian home lending by all banks up 6 per cent on a year ago.

"Despite wide spread concern of increasing household indebtedness, the ratio has steadily increased during the past nine years from 43 percent in January 2008," Ellis says.

He also notes Commonwealth Bank, Westpac, ANZ Bank and National Australia Bank continue to grow its Australian home loan portfolio at a steady pace.

Mortgage broker Mortgage Choice faces a tougher time, particularly given the damning findings of the Royal Commission into Financial Services, and recent reviews from the regulator ASIC and the Productivity Commission.

In response, Ellis reduces his fair value estimate by 16 per cent, to $2.10 from $2.50.
"Our uncertainty rating change reflects the wide band of potential outcomes that could occur over the next few months.

"Additionally, despite diversifying the income base, the earnings contribution from the diversified products and financial planning division is limited. The concentrated source of income supports our high uncertainty rating," Ellis says.

He believes changes to the structure of the mortgage industry, particularly around commissions, may result from the regulatory reviews. "The increased regulatory and media spotlight on the industry is why we expect the makeup of upfront commissions to reduce over time, particularly the removal of volume-based incentives."

In the area of property prices and home loans as they impact Mortgage Choice, Ellis expects growth in home loan approvals to slow modestly "due to tepid Australian economic conditions, increasing pressure on housing affordability, tougher lending criteria, weak wage growth, and eventually higher interest rates".

However, he remains positive in his outlook for the company's longer-term prospects, seeing it "well-placed to maintain solid earnings growth as it expands its broker footprint, streamlines procedures, enhances systems, broadens its product range, ups its marketing effort, diversifies, and invests further in online capabilities".

More from Morningstar

• 5 Aussie large-caps trading at a discount

• Small cap winners are grinners, but losers silent

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Glenn Freeman is a senior editor at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend