News Analysis: Concerns slowly growing on Australian financial stability

Though Australia's financial system is stronger than its advanced peers, risks to stability are slowly mounting.

Investment bank UBS on Friday said 28 percent of 1,228 Australians who have recently taken out a new mortgage stated their application was not factually accurate. The investment bank went further, stating the misrepresentation of mortgage applications is systemic across the nation.

"If anything, we believe this data is likely to understate the level of misrepresentation as some respondents my not feel comfortable stating they were not completely factual and accurate even in an anonymous survey," UBS said.

While the bulk of those admitting to misstating their information said their applications were "mostly factual and accurate", 14 percent had overstated their incomes, 26 percent had understated living expenses, 13 percent overstated asset values, 17 percent understated their debts, while 42 percent said "other" or "would rather not say". 12 percent stated they had lied on multiple factors.

The UBS analysis however shines a light onto the emerging mortgage broking sector. While 32 percent of those who misrepresented their financial status secured a mortgage via broker, alarmingly 41 percent said they lied at their broker's suggestion. Bank loans accounted for 22 percent of misrepresentation, with 13 percent saying it was suggested they lie.

"Given the significantly higher level of mortgage representation coming through elements of the broking community, and evidence that high levels of misrepresentation is being suggested by the brokers, this distribution channel appears to be a blind spot for the banks and potentially for broader financial stability," UBS said.

"We believe banks need to tighten underwriting standards via the broker channel, even at the expense of near term market share."

The warning follows the International Monetary Fund (IMF) on Thursday suggesting Australian -- and other advanced economies -- households are on a dangerous debt binge, increasing the risk to some advanced economies of another banking crisis.

The housing market acceleration in Australia has seen household leverage increase to 186 percent debt to income. A shock in the property market would leave Aussie banks vulnerable, given mortgages now account for 62 percent of their total loan book.

The IMF -- in it's Asian region update -- suggested Australia's record low cash rate is fuelling the housing market, suggesting intense supervision of the banks are needed to minimise risks of a bubble.

"Some central banks in the region also need to weigh the benefits of prolonged monetary accommodation against the risks for asset prices and domestic fiscal conditions more broadly," the IMF said.

While the take-up of more risk in the pursuit for yield and capital gains in the highly liquid, low rate environment hasn't become a problem as yet, it "clearly leaves you more exposed" should Australia's economy suffer a shock, Commonwealth Bank of Australia chief economist Michael Blythe told Xinhua.

Historically speaking, a financial crisis in Australia would be triggered by either rising unemployment or rising interest rates. Unemployment is continuing to trend lower, while discussion is continuing as to whether the Reserve Bank of Australia (RBA) will continue to ease monetary policy.

The emerging risk in the financial system however is the continued slack in the labour market, where underemployment and stubbornly weak income growth -- as is the case in other advanced economies -- is pushing up debt to income ratios while keeping inflation low, Blythe said.

"We're not seeing the real value of debt being eroded away than normally would be if inflation were at more normal levels," Blythe said.

"The (current) real burden of debt is higher than it would have been in earlier times."

Blythe suggested the income risk however has started to recede "a little" as spot prices for key export commodities -- iron ore and oil -- have recovered over the past six months, but "clearly it's something that should be watched."

Changes in household asset mix also need to be watched as Australians again seek yield in financial markets due to the low rate environment, taking on more risk. Australia's financial market, the Australian Securities Exchange (ASX) are highly influenced by moves offshore, and with questions continuing over the health of the European banking system, fear selling can spread.

"It's just over eight years since (Lehman Brothers) went under... it serves as a reminder that if a major institution gets into trouble, just how quickly those troubles can spread and how damaging they can be," Blythe said.

Households however have taken steps to mitigate risks, with borrowers fixing payments in constant dollar terms, automatically accelerating the rate of deleveraging as interest rates drop. Spare cash also been placed into mortgage offset accounts where they're earning the mortgage rate after tax on a cash investment.

"The average borrower has about 31 months of protection," Blythe said.

"The headline numbers look a little bit scary and you can see why regulators and policy makers worry about these things, but certainly in Australia's case there's a lot going on behind the scenes, meaning we're a little bit better placed than most should anything go wrong." Endit