TICKY FULLERTON, PRESENTER: Here is a story about Australia's precariously balanced housing market.
As Australians tighten their belt in the wake of the global financial crisis, house prices are falling.
It's a situation with serious implications for not just the banks, who are highly leveraged to housing, but for the whole economy.
Well in a moment we'll be talking in the studio to ANZ Australia's boss Phil Chronican, but first this report from Andrew Robertson.
ANDREW ROBERTSON, REPORTER: Australia's banks could be sitting on a potential time bomb. Home owners are mortgaged to the hilt and house prices are falling.
LOUIS CHRISTOPHER, MD, SQM RESEARCH: When we look at the private mortgage debt as a percentage of GDP, we're actually at the same level that Ireland is at, at a private level. Fortunately, at the public level we don't have anywhere near as amount of debt as what they do.
ANDREW ROBERTSON: According to the Reserve Bank, mortgage debt in Australia, at $1.2 trillion, is roughly the same as the economy's total gross domestic product. It's a big number and the banks are heavily exposed, with home mortgages making up at least half the assets of each of the big four.
Of particular concern is the 20 per cent of the mortgage market who bought their houses in 2009 when interest rates were at record lows. As rates have risen, many of those people are now paying hundreds of dollars a week more and an increasing number are struggling.
SCOTT MANNING, BANKING ANALYST, JP MORGAN: The interest rates are seeing higher delinquency rates come through, so if you look at the level of interest rates today versus two years ago, they are about two, 2.5 per cent higher. And indeed the delinquency rates reported by the major banks have basically doubled over that time.
ANDREW ROBERTSON: Scott Manning points out from a bank profit point of view, most mortgages are insured. He believes a bigger worry is that households generally are more conservative.
SCOTT MANNING: We've seen their temporary spending reduced with their retail sales weakness over the last 12 to 18 months. And I think that'll translate into a more permanent rebasing of household expectations through lower gearing tolerance, ie they just won't be willing to borrow as much.
ANDREW ROBERTSON: And borrowing is the big driver of bank profits. The double whammy for both banks and the economy is that with house prices falling there are a growing number of people whose mortgage is now worth more than their house.
LOUIS CHRISTOPHER: Being in negative equity means you generally are going to reduce your spending, you're going to try and save more to get yourself out of that position, and that's where you had that multiplier effect in spending for the rest of the economy and why it will actually slow the economy down even further.
ANDREW ROBERTSON: Louis Christopher is predicting house prices could drop by up to 10 per cent in coming months, with Perth and Brisbane leading the way down. KPMG chief economist Nicki Hutley agrees a 10 per cent fall is feasible and says if that happens the negative impact on the economy will be significant.
NICKI HUTLEY, CHIEF ECONOMIST, KPMG: For every one per cent fall in the value of housing, you're going to get a very small but nevertheless significant fall in consumption, possibly as much as 0.1 of a per cent, which doesn't sound like a lot, but given that consumption's 60 per cent of the economy, that's quite a lot.
ANDREW ROBERTSON: So a 10 per cent fall in house prices, according to Nicki Hutley, will equate to a one per cent fall in consumption, or in dollar terms well over $10 billion.
NICKI HUTLEY: We see it's the discretionary spend, whether it's tourism or it's luxury items, that go, not your basics of food and clothing.
ANDREW ROBERTSON: Which will affect many sectors in the economy and the overall demand for credit, which is one reason why JP Morgan's Scott Manning has revised his outlook for the banks downwards.
SCOTT MANNING: We can't see at this point any area that will materially benefit their earnings.
ANDREW ROBERTSON: And Scott Manning is not alone. Bank shares have underperformed the wider stock market over the last 12 months, and with the next movement in interest rates set to be up, that pain for bank investors is set to continue.
