Australia's housing market to bite banks' profits

Even with Australia's housing market already cooling in 2017 and continuing over the coming quarters, it will still weigh on Australian banks' profitability as credit expansion slows, BMI Research reports.

BMI Research says residential mortgages account for slightly more than 60% of the overall loan portfolio of Australian banks. Notably, the series of tightening macroprudential measures by domestic regulators since 2014 in an effort to curb speculation will likely act as a drag on credit growth.

At the same time, stretched household balance sheets (at a time when wage growth is still subdued), poor housing affordability, and an increase in housing supply will also likely weigh on house price gains.

BMI Research expects investor housing credit to be the most negatively affected due to tighter lending standards as regulators implement measures to curb housing speculation. Notably, the restriction of the flow of new interest-only residential mortgage lending, which took effect in March 2017, will continue to weigh on credit disbursed to investors.

According to data from the Australian Prudential Regulatory Authority (APRA), the share of approved interestonly loans as a share of overall new residential term loans to households fell to 17.0% in September 2017 (versus the limit of 30.0% and from 37.7% in December 2016), and is therefore weighing on investor housing credit activity.

Indeed, investor housing credit growth moderated to 6.1% y-o-y in December 2017 from a cyclical peak of 7.4% y-o-y in May 2017.

Additionally, stretched household balance sheets suggest that there is little room for lending to expand at the previous strong pace. According to data from the Reserve Bank of Australia ( RBA), household debt rose to a record high of 188.4% of annualised household disposable income in September 2017, which represented an increase of 25.6 percentage points over the past decade.

Debt related to servicing housing related payments accounted for a lion's share of Australian household debt, coming in at 73.0% as of September 2017.