Banks walking fine line on mortgages

Australia’s major banks are too reliant on Australian mortgages for their collateral and could face a withdrawal of foreign capital if foreign suppliers believe the property market is becoming unstable, according to the chief investment officer of Wingate Asset Management, Chad Padowitz.

“So much of the capital in the banking system is non-Australian, and it effectively depends upon on people having confidence in the economy, in high interest rates and the ability for [mortgage holders to repay mortgages], so it’s very important that property stays stable, because if people are worried about the underlying collateral, they will take it out,” Padowitz said.

He also warned about the effect of rising interest rates.

“There is fine line between raising interest rates now to prevent a property bubble from turning into a bust, and raising interest rates that cause a bust,” Padowitz said.

“Very few people know where that line is.”

Any investors who are worried about the strength of the property market shouldn’t have a positive view on the banks, Padowitz said.

“At the least there’s a risk, but it’s hard to say how big it is,” he said.

“While mortgage stress isn’t near breaking point, if there is a 20 per cent price drop in property like during the financial crisis, and increased unemployment, then people won’t be able to ride through any problems and continue paying off their mortgage,” he said.

“There isn’t enough diversity in banking collateral outside the property market,” Padowitz added.

While any collateral can’t move out of the system immediately, if there was significant fear about the property market over a period of time, it would have an immediate impact, he said.