Australian Bank Bond Buyers Query Bubble, Fitch Says

Foreign buyers of Australian bank bonds are increasingly concerned a bubble is developing in the nation’s property market, according to Fitch Ratings.

Offshore investors have been asking whether there’s “an asset bubble forming in the housing market,” John Miles, a senior director at Fitch, said at a conference organized by the ratings firm in Sydney today. “If the investors perceive there is, then that could be a problem.”

Australian house prices rose the most since at least 2003 in the year through March, jumping 20 percent, according to the statistics bureau. Banks are at risk if a housing bubble bursts as falling property prices would affect the value of assets underpinning home mortgages.

The nation’s banks rely on overseas markets including the U.S. and Europe for about 30 percent of their wholesale funding, according to the International Monetary Fund, making them vulnerable to investor sentiment. Australia’s four biggest banks had A$778.9 billion ($679 billion) of housing loans outstanding as of March, according to data from the banking regulator.

Lenders must maintain standards to prevent the surge in house prices from turning into a bubble, Luci Ellis, head of financial stability at the Reserve Bank of Australia, said in a speech in Sydney today. The recent price gains were driven by population growth, she said.

Government Guarantee

Australian banks have A$154.4 billion of government-guaranteed bonds outstanding, according to government data from March. The guarantee was introduced after the collapse of Lehman Brothers Holdings Inc. shuttered credit markets to all but the safest debt, and was withdrawn March 31.

“The use of the government guarantee, whilst necessary, leaves a hangover of debt that at some point is going to have to be refinanced,” Miles said. “Banks are counting on investors having not only the appetite to absorb that guaranteed issuance, but also the appetite to meet the banks’ demands for funding for growth.”

The nation’s four biggest banks, Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd., are among the 10 biggest sellers of bonds in the Asia-Pacific region, according to data compiled by Bloomberg.

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