THREAT TO BANKS DUE TO AUSTRALIAN COMMERCIAL REAL ESTATE

"Relative to other parts of the globe, we've been more cautious on Australian bank risk, particularly giving the reliance of Australian banks on foreign funding," said Mr. Shah. 

The economic slowdown in China, along with a crackdown on foreign investors has emerged as one of the factor that has undermined the residential property market.

 According to the research note, there is a growing likelihood of an eventual house price "correction" – which means a fall of 10 per cent from peak levels – because of "imbalances" in the market which include the dominant role of investors and pressures on affordability.

Analysts Ilya Serov, Patrick Winsbury and Stephen Long argue that although banks' balance sheets are strong yet several statistics show these "imbalances" are deepening, making a correction more likely.

In particular, they highlight the fact that some households are spending a greater share of their incomes on their home loans, even when interest rates have fallen.

The recent data says that total housing debt has reached a record high of 140 per cent of disposable household income.

Australia is going through a period of sustained house price appreciation and an increase in household debt. These trends pose a threat to Australian banks because they increase the risk of the correction in the housing market.

This increased supply and tighter financial availability raises the risk of non-settlement, and could expose residential property developers to elevated levels of financial risk. Moreover, it could depress overall market sentiment and put downward pressure on general house prices.”

The hustle-bustle in the housing market are also relevant in considering risks in commercial property markets. This area of Australian business activity has strengthened over the past years, unlike most other parts of the business sector. Australian commercial property has allured strong investor demand, both domestic and foreign.  Any significant reversal of this demand could expose the market to a sharp repricing. At this stage, however, the broader risks to financial stability from this source remain modest, because banks’ commercial property exposures are a smaller share of banks’ total assets than prior to the crisis.