My 'banking story' is just a hypothesis of how the banks can increase margin from the same loan book And it is obvious if there is any housing sudden bump down the RBA will lower rates. Everything possible will be done to prevent a housing crash and a bank crash.
I am just trying to think about this apocalyptic housing and bank crash that is bandied about in the media. And as an investor in WBC I want to think about how they will 'survive' and keep profitability.
The key numbers to really know about would be mortgages taken out in the last two years and the loan to house value and the percent of interest only. The interest only have fallen a lot in percent of all loans, but I only saw the fall in those percents kick in late in 2017. The banks will have these numbers.... I wonder if they are public.
You can have a huge crash if 10 or 20% of all loans outstanding were taken in say 2016-2017 and a third are interest only resettable in five years. Then the crash comes in 2021-22. But a gentle 1/2% a month fall in home values for say the next 24 months, is very manageable. We are down 5 to 6% in the last 12 months. Tack onto that another 12% over two years, and you have a fall (from peak) of 15 to 17%. Again, since the prices went up 60% over the previous 5 years.... who cares if they fall back 15%.
But if this does happen (15% fall between 2018 and 2021) that matches up with the interest only loan resets. So people who bought at the peak (our Penrith example), if they hold their house, and they have an interest only loan, and they need to reset in 2021-22, and they cannot afford to reset (cant pay higher monthly costs and dont have money to kick in to get the ratio back to 80%)... then they are 100% FORCED to sell.
In the forced sale they are going to lose their 20% equity. It is as simple as that. So then we 'wonder' for those who did not put up 20% and have mortgage insurance, do your REALLY believe the insurance company will be able to afford to cover a lot of losses.
As the other commenter pointed out, people will do all they can to stay in the house. And I see that as a way for the banks to squeeze a bit of extra margin. But again, it makes for a Zombie economy. If people put all their income into staying in their house, they dont have money for 'the economy'. It is what happened in Japan starting about 1980. Everyone got 'under water', but just stayed in their houses, no matter what. Then Japan has 30+ years of Zombie NOTHIN. No wage growth. No economy growth. No growth in asset (house) values. No growth in nothin. You just have the Japanese central bank printing money and having zero percent interest rates (they even went NEGATIVE for a while).
I guess Aussie govt and regulators have caught the Aussie bubble just in time. And they are slowly deflating it. A 15% home decrease will be great. And the economy will 'just' survive. And the banks will 'just' be OK. All this because Aussie loves banks and will hang onto their homes as best they can.
(but I can be wrong, it may be investors (corporates) have borrowed NON-recourse debt and will just let the bank wear property losses; but prices need to fall more than 15% and the loans must be very levered up.... remember the old 95% and even 100% LVR (loan to value ratios)
this is all just my opinion, but based on a lot of reading and thinking about it
(20min delay)