Rating Australia's housing risk

The reason Australian mortgage rates are so high is because overseas lenders are pricing into their Australian bank lending the danger of a bubble-like property collapse.

At last someone is prepared to tell us the truth as to why Australian mortgage interest rates are not going to fall substantially any time soon. And at the same time it shows the significance of the Bank of Queensland loss.

In his KGB interrogation Pimco’s Peter Dorrian explained that the major overseas wholesale lenders to Australian and world banks visit Australia and study our housing market. They conclude that there is great danger of a bubble-like collapse.

Here in Australia we believe that the chance of this happening is remote but the people who fund about 40 per cent of our banking assets think we are simply ignoring the risk.

In other words, they believe that because our four major banks are substantially exposed to Australian houses and apartments that are much more expensive than other parts of the world, they carry a danger to lenders.

And that danger is priced into the higher interest rates that overseas wholesale lenders demand that Australian banks pay. Those higher interest rates in themselves increase the danger of a housing downturn should our economy fall back and unemployment rise. Of course, for that to happen China would have to encounter a major slowdown.

The Bank of Queensland reversal was in part caused by the tough times in the commercial and residential property markets in areas like the Gold and Sunshine Coasts. For the overseas wholesale lenders that would confirm the long-term vulnerability of our big banks.

I put to Peter Dorrian the question of whether, if the Australian government either guaranteed the banks or borrowed money overseas and then on loaned it to the banks, that would satisfy the overseas lenders? Dorrian looked me in the eye and said that the lenders might then re-rate Australian government borrowing. I think the chances of a major housing collapse in Australia are not high but as Australians we must all recognise that is not the view of the rest of the world, and that overseas lenders are in a position to play a major role in the level of home mortgage interest rates.

We can only hope that Treasurer Wayne Swan reads the KGB interrogation and stops shooting off at the mouth about a problem that is far deeper than banks simply not passing on Reserve Bank interest rate reductions.