Three most important questions

  • Where would housing stress begin?

  • What triggers a crash?

  • What is exposed to the crash?

Aus most exposed at first glance

Aus mortgages have not been tested by large house price declines

Aus mortgages have not been tested by large house price declines

Even though unemployment increases have been major

Two scenarios

  • Assume unemployment rate to 11% and slow decline
  • Scenario A: 5% of loans into arrears. Loan contraction. -20%+ to house prices.
  • Scenario B: 1.5-2% of loans into arrears. Mild loan contraction. -10% to house prices.

House price spirals

  • House price spirals come from bank lending contraction w/ house price declines
  • Generates a house price, lending spiral
  • Dual trigger of unemployment + LTVs

Dual trigger (2008 US Meltdown)

WA and NT experiences

  • Price falls are -23% (NT), -20% (WA) in last 4 years

WA and NT experiences

  • Price falls are -23% (NT), -20% (WA) in last 4 years

Half of loans with insufficient buffers

  • Half of borrowers are more than a year ahead of repayments.
  • Can withstand a full year of unemployment.

At risk loans

  • Predominantly from the occupiers, not investors

Current LTVs given purchase date (Syd, Melb)

  • Mortgages at risk are those originated in last 3 years

Loans at Risk are 11% of all mortgages

  • Representing 11% of all mortgages

Scenario analyses

  • Currently 3% of all mortgages LTV > 100
  • A 10% price decline shifts to 6.5%, 20% to 18%.

What is exposed?

  • Initial 10-15% declines will be entirely US reinsurers.

At risk groups have fewest mortgages

Indications from US experience

Indications from US experience