Property bubble bets help spur surge in Aussie bank bond risk

Canberra / Bloomberg

The cost of insuring the debt of Australia’s largest banks surged by the most in four years after a report by research firm Variant Perception fueled speculation about risks in the nation’s housing market.
The average cost of credit default swaps for the four biggest Australian lenders surged by 18.6 basis points, the largest one-day increase since November 1, 2011, based on CMA prices. The contracts reached 142 basis points, the highest level since October 2012, when the European debt crisis was at the forefront of investors’ concerns.
Australia’s banks are exposed to an economy that’s being buffeted by the slowdown in China, the collapse in global commodity prices and a decline in capital spending.
The Reserve Bank of Australia’s bid to support the economy with record low interest rates has helped fuel a boom in housing that’s now showing signs of stuttering. The past week has seen several reports in local media discussing the report from Variant Perception.
“Negative press coverage on the sector earlier in the week may have contributed to some buying of protection over the past few days, in particular yesterday,” said Gus Medeiros, a Sydney-based analyst at Deutsche Bank AG.
“There’s probably greater interest from offshore investors.”
Housing prices in Sydney, Australia’s largest city, recorded their biggest quarterly drop in four years in the final three months of 2015 as a regulatory crackdown pushed up mortgage rates and dented affordability. In the past week, the Australian Financial Review was among media that cited a report from Variant Perception warning of a housing bubble in the nation.
While CDS have blown out, there has been less movement in the price of actual bonds issued by Australian banks.
The spread over the swap rate for Commonwealth Bank of Australia’s January 2021 fixed-rate Australian dollar bond was at 135 basis points on Friday, little changed from a week earlier, based on Australia & New Zealand Banking Group Ltd. prices.
Share prices for CBA, Westpac Banking Corp., National Australia Bank Ltd. and ANZ have all dropped this week by at least 3.5 percent, outpacing losses on the benchmark S&P/ASX 200 index.
The Australian property market has shown steady increases of around 3% per annum since the 1970s. Since the 1990s however, prices have risen by around 6% per annum.
In the late 2000s, house prices in Australia, relative to incomes, were at levels similar to many comparable countries, prompting speculation that Australia was experiencing a real estate bubble like many comparable countries. Since then, several comparable countries have experienced property crashes.
Australian house prices rose strongly relative to incomes and rents during the late 1990s and early 2000s, however from 2003 to 2012 the price to income ratio and price to rent ratio have both remained fairly steady, with house prices tracking income and rent growth during that decade. Since 2012 prices have once again risen strongly relative to
incomes and rents.