Soaring house prices in Sweden, Canada, New Zealand and Australia have sparked warnings about the next real estate crash. Luckily, they have among the world’s most robust banking systems. Danielle Myles analyses the data.

Ten years after the US housing crash, the International Monetary Fund’s Global House Price Index is once again approaching an all-time high, fuelled by surging property markets in developed economies from every region. Four of these economies have been singled out by multilaterals, rating agencies and analysts as bubbles that could burst.

New Zealand, Australia, Sweden and Canada have been identified as most vulnerable to a housing market correction. Their real estate prices and consumer debt rose more in the past three years than their peers, according to rating agency Moody’s. Australia’s household debt-to-disposable income ratio is at a record high of 190%, while the other three score between 168% and 180%.

It begs the question whether defaults will occur en masse once interest rates head north and house prices drop. A widely cited Goldman Sachs report from May 2017 puts the probability of a bust – defined as a 5% price drop over the next two years – at about 40% for New Zealand, 35% for Sweden, 30% for Canada and 25% for Australia.

Mortage books Sweden and Australia

Mortgage exposure

The loan books of these markets’ largest banks reveal how exposed they are to a housing market correction. Australia’s big four banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank – are also New Zealand’s biggest lenders, meaning they are exposed to both countries’ real estate bubbles.

Their aggregate mortgage portfolio dipped in 2013 but has surged by 45% since then. But their loan impairment provisions – the loss recognised to account for non-performing and otherwise impaired loans – continued to drop for two years after real estate lending rebounded. In 2017 their aggregate provisioning slumped again, despite their mortgage holdings nudging up 6%.

Mortage books Canada

Sweden’s biggest banks’ portfolio has followed a different trajectory. The aggregate mortgages held by Nordea, SEB, Handelsbanken and Swedbank dropped in the three years to 2017. This aligns with national reforms designed to contain mortgage growth and SEB chief Johan Torgeby’s comments to the Financial Times in November regarding the bank’s decision to lend at a slower pace than the national average. The four banks’ total impairment charges and provisions have shrunk at a faster rate than their mortgage book, although they plateaued in 2016.

Royal Bank of Canada, Toronto Dominion Bank, Scotiabank and Bank of Montreal’s exposure to the property market has fluctuated in recent years after surging from 2011 to 2013. Their aggregate loan provisions slid for three years before spiking 30% in 2016.

Robust fundamentals

Moody’s believes the banking systems of Australia, Sweden and Canada are capable of absorbing losses from a real estate downturn (in most scenarios) through their earnings, supported by their strong return-on-equity (ROE) ratios. Australia’s big four have ROEs exceeding 15%, more than four percentage points higher than the regional average. Their counterparts in Canada posted ROE of between 14% and 19% in 2016, while Sweden’s biggest lenders have ratios between 11% and 18%. The western European average is just 5.5%.

Furthermore, the 16 banks’ risk-weighted capital adequacy ratios range from 14% (Bank of Montreal) to 32% (Swedbank). Their property markets may be overheated, but banks’ efforts to shore up their balance sheets suggest they have insulated themselves from the worst of the fallout.

All data sourced from www.thebankerdatabase.com

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