Credit Suisse has downgraded the banking sector on pessimistic outlook for the housing market.
The broker has lowered its recommendation for the sector to underweight in anticipation of job cuts, payment shocks and declining house prices.
The consensus view is that the banks are quality yield plays having basically sailed through the post-GFC years unscathed with their strong balance sheets intact and robust dividend yields.
"However, we believe that banks are only bond proxies to a point. Valuations are not attractive, and there are downside risks to earnings and dividends as deleveraging risks intensify,” Credit Suisse said.
"We are particularly concerned about payment shocks on interest-only loans (which make up roughly a third of the mortgage book), as well as the effects of rising unemployment.”
The broker is concerned about risks associated with the over-geared housing market where it believes investors are struggling to make money because of net rental yields of 3.2 per cent being well below mortgage rates of approximately 6.4 per cent. It is also quite downbeat about the prospect of house price inflation given Australian housing is 20-40 per cent overvalued by historical standards.
Credit Suisse adds that housing demand is extremely low due to concerns over unaffordability and job security. If this continues relative to supply, the broker believes housing prices could fall considerably.
Having outlined the above concerns, it did add that all does not have to end disastrously.
"If the RBA cuts rates deeply (to around 1.5 per cent), it could stabilise debt dynamics and house prices, buying households time to work out their over-indebtedness.”
"However, the RBA does not seem to be contemplating deep rate cuts despite the slowdown in train. Also, the lack of pass-through of RBA cuts is becoming a problem,” Credit Suisse said.