Property risks are rising for Asia-Pacific banks: Fitch

Lynette Lau
Property debt in Australia, New Zealand and Hong Kong
Property debt in Australia, New Zealand and Hong Kong

Banks within the Asia Pacific region are set to face higher risks from property, Fitch Ratings said this month.

That is, the ratings agency noted that banks in the region have achieved "relatively high exposure" to the property sector, and that has increased their vulnerability to any shock from the likes of an interest rate hike. And, although a downturn did not appear imminent, there could be a problem in the medium turn, it added.

"The risk across [Asia Pacific] of a residential property market downturn that significantly undermines banks' asset quality is unlikely in 2018, given that economic conditions are likely to remain benign," Fitch said. "However, rapid mortgage lending growth, incrementally higher risk-taking and relaxed mortgage pricing amid competitive pressures are likely to have created vulnerabilities that could be tested by a change in economic conditions."

The ratings agency noted that rising interest rates are "a potential trigger," for such a test.

Of note, Fitch flagged banks in Australia and New Zealand as facing the highest property risks in the region.

"Household indebtedness is highest in Australia and New Zealand," explained Sabine Bauer, senior director of financial institutions at Fitch Ratings, and one of the authors of the note on Asia Pacific bank property risks.

According to her, Australia's household debt-to-GDP ratio stands at 140 percent and New Zealand's at about 92. Meanwhile, in December 2017, property loans were 43 percent of Australian bank assets and 46 percent of New Zealand's bank assets — up from 39 percent and 43 percent, respectively, five years earlier— Fitch said.

The risk for Australian and New Zealand banks is expected to remain high, as "household interest is rising and interest rates are still low," Bauer said.

Those factors drive up household debt, but Bauer said "there is still a lot of support for the property market" in Australia. According to Bauer, "Fitch expects just one interest hike in Australia this year, and two next year," which could contain any excessive growth of a real estate bubble.

Reiterating the sentiment expressed in Fitch's release, Bauer said she doesn't expect there to be a "big event in 2018." Instead, the "gradual increase in interest rates" is what Fitch will be watching.