Property a bittersweet pill for banks to swallow

Financial analysts have flagged residential property as both a risk to the Australian financial system and a key driver of economic growth.

Morningstar noted in a research report that the primary risk surrounding Australian banks is the impact of record-low rates on property prices.

“The residential property market remains both a risk to financial system stability and a key driver of economic growth in the major population centres on the east coast of Australia,” the report said.

“Despite record-high residential dwelling construction, demand continues to exceed supply for both new and established housing, particularly in Sydney,” it said.

“Risks are centred on historically low interest rates boosting property markets to unsustainable levels.”

The Morningstar report noted that there is an increasing expectation that interest rates could stay lower for longer and underpin the ongoing global search for yield.

The report provided an outlook for Australia’s major lenders, which it said remain in a strong position despite increasing competition from smaller non-bank players and emerging new technologies.

“Australian banks are in a sweet spot − the economy is not too hot and not too cold, reflecting historically low interest rates, low inflation, a lower exchange rate, lower petrol prices and strong property and equity markets,” the report said.

“Operating conditions for the banks are supportive of further good earnings and dividend growth, with solid credit growth boosting top-line revenue, good deposit growth, broadly stable margins, tight control of operating expenses and, most importantly, benign bad debts,” it said.

However, loan impairments are likely to start gradually increasing in late 2016 as the credit cycle inevitably turns, according to the report.

[Related: Reserve Bank says major downturn may be coming]

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