How healthy are Australian banks?

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**Sam Hawley** (0:09)
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**Carrington Clarke** (0:36)
Good day, listeners. We've got another special episode of ABC Business Daily for you today. There has been an absolute stream of news out of the banking sector in recent weeks, from earning results, to plummeting home loan applications, to watch tracks, investigation, into mortgage fraud. So I wanted to get an expert in to dig into it all and unpack a few of those burning questions I've had, and hopefully you have as well. I think you'll enjoy it. So welcome to ABC Business Daily.
I'm Carrington Clarke, and joining me is...

**Brian Johnson** (1:08)
Brian Johnson, bank analyst at MST. Very old man too, by the way.

**Carrington Clarke** (1:12)
But youthful looking, full of energy, and this is your maiden podcast, is that right?

**Brian Johnson** (1:17)
That's correct, Carrington. This is a whole new world for me.

**Carrington Clarke** (1:20)
A whole new world for you and a whole new world for our audience to hear your insights in podcast form. I mean, let's just dive straight into it. I mean, there's been a few big topics this year. One, what's going on in the Middle East. You've got the artificial intelligence, investment boom, and associated share price climb. But here in Australia, it's all about property and concerns about what's happening in the property sector.
Are we on the cusp of a major downturn? How vulnerable are our banks if that does occur?
Big picture. How concerned are you about what's happening in property?

**Brian Johnson** (1:51)
My predisposition is to be pretty miserable at the best of times. But when you have a look at Australian house prices, I don't know, Carrington, whether you remember when we first spoke, it was about how ridiculous house prices were. And they're only up 100% from that level.
But when we have a look at it, house prices in Australia are stupid.

**Carrington Clarke** (2:09)
And has been stupidly expensive.

**Brian Johnson** (2:11)
Stupidly expensive. And what it is, it reflects a whole lot of things, but it's basically this structural imbalance between supply and demand. But the other thing is that we've also had this ridiculous system, I think anyway, where you've had a full tax deduction on the negative gearing. But an element of your funding cost is inflation, but you only get taxed on 50% of the inflation adjusted gain. So when you take that out, it changes the maths on investing in a property loan quite significantly. If we have a look at the budget, when they came out with the changes, they were saying they expected house prices would go up, but at a more modest rate. A 2% reduction, what it would otherwise be was what the total is. Then over and above that, rents would only go up modestly. Now, what we've seen, the initial reaction is demonstrably the opposite of that. It does feel to me that given that house prices is really just the ultimate game of shells, like it's all about confidence, you take that away.
House prices is still expensive, it's cheaper to rent than buy. I would have thought house prices continue to fall. Now, is that a disaster for the banks? It'll slow down their credit growth.
But banks in Australia, they don't really do much lending at very high loan to valuation ratios. There's not a gigantic credit impact, but it's more that it probably just slows down the whole economy, and it certainly slows down their net interest income going forward. So I think that's probably the major implication of it.

**Carrington Clarke** (3:34)
So when you say you expect it to fall, we've got a whole range of different forecasts out there about how much people think property prices will fall. Some are saying 5%, is it going to be 10%?
We've had Ian Verinder talking about, if you look at what happened in New Zealand and Canada, when they had their changes, 20% starts to look possible. Do you have a view?

**Brian Johnson** (3:51)
Yeah, I do. I do. And it's a very, very simple view, which is that if you really needed to sell your house or apartment tomorrow, what price would the real estate agent tell you you would get? And across the board, it's about 15% below the peak worth.