Banks Yet To Face Their Toughest Test

Sun Herald

Sunday October 12, 2008

David Potts

THE credit squeeze will end where it began - and it's a place that might surprise you.

Don't ask me when or how bad it'll get first but you can take Wayne Swan's word for it that financial conditions are the worst since the Depression, though it's not something I'd be saying too loudly if I were him.

What a comfort, then, to hear that our banks are the safest in the world. A bit too safe, if you listen to Malcolm Turnbull, not that you do of course. Sorry, but our banks haven't really been tested yet.

In all the acres of forests that have been sacrificed to the reporting of the credit squeeze, the real difference between the US, Europe and Australia has gone virtually unnoticed. Their property prices are in free fall and ours aren't.

Housing prices in many areas of the US and Europe have collapsed, forcing huge write-downs by the banks to their capital.

So the subprime problem started it all but it quickly mutated into a credit squeeze, as no one knows who has the toxic debt and where it may be.

That's put the banks in a vicious circle of foreclosures, forced sales and ever-diminishing property values.

Could it happen here?

There's already a localised crisis of falling property prices in outer Sydney, which, to their credit the banks have handled well.

But life's about to get a lot tougher for them as the economy turns down and bankruptcies accelerate. Australia's twin booms of commodity and housing prices are over. Commodity prices are dropping, though the real damage won't show until next year, when coal and iron ore contracts are renegotiated.

But it's in housing where the banks could come unstuck. Approved finance to buy a place has slumped 25 per cent in the past year and that's not so much due to the credit squeeze as lack of demand because housing is so unaffordable.

Sure, interest rate cuts will help but not much in the context of the rising job losses forecast by the Reserve Bank.

Especially when first-home buyers and economists will tell you that Australian property is overpriced to begin with.

© 2008 Sun Herald

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