Australian banks haunted by financial instability risks from the property market

Banks will have to guard against any potential losses.

According to BMI Research, Australian policymakers remain concerned about financial instability risks stemming from the potential of a sharp correction in the overvalued property market, and their efforts go beyond macro-prudential measures.

Here's more from BMI Research:

Indeed, Australia's record high household indebtedness (standing at 123% of GDP in Q216 ) poses significant risks to its financial system. The country's household debt as a share of GDP has been driven by mortgage lending, in tandem with the surge in house prices, and is one of the highest among developed economies.

Using data from the Bank of International Settlements (BIS) on 21 developed nations, we calculate that Australia's household debt as a proportion of GDP in Q216 was 43.2 percentage points (pp) above the average of 79.8%, and 24.1pp above the 75th percentile nation, Norway.

It is therefore likely that the APRA will still want the country's banks to maintain or further improve their capital positions, in order to guard against any potential losses. The banking system's return on equity is likely to be negatively impacted from the increased regulatory burden over the coming quarters.