Are our banks at risk if the property market goes belly up?

According to the Financial Review, Australia’s biggest banks have been fighting over the mortgage market for too long and if property prices fall too far, we could be in for a US-style banking collapse.

With the exception of ANZ (ASX: ANZ), our top four banks are not exciting from an investing perspective and are too heavily leveraged on growth through their mortgage books. If Australia were to experience an unemployment boom, loans would struggle to get paid, leading to more defaults and eventually lower housing prices.

This would paint an ugly picture for our biggest mortgage writers like Commonwealth Bank (ASX: CBA) and Westpac (ASX: CBA).

In March, Westpac reported a 23% housing market share with a customer deposit to loan ratio of 69% and highlighted it as one of the highest priorities for the bank moving forward. This is crucial to remain a viable lender and will become increasingly difficult with the lower dollar and cash rate making our banks less appealing for international investors and local term deposit holders.

Commbank enjoys the largest share of the domestic housing market (25.1%) and delivers 65% of total funding through deposits. In its half-year report to 31 December 2012, the company highlighted the importance to look outside Australia for growth opportunities. Despite offering over 2.9 million banking and financial products and increasing home loans by 15% year-on-year through its retail banking services, the company lost 11% of its retail deposits.

In the past two months, local housing prices have started to look up for homeowners and the banks. With the lower cash rate, investors are taking part in some soft housing prices and slowly pushing them in the right direction. The housing market is essential for Australian banks, not only for mortgage books but also as the economy transitions away from the mining boom, which has seen massive amounts of international investment.

Foolish takeaway

As long as housing prices remain strong, Australia’s banks will continue to make profits and investors can take advantage of some good dividends in the process. Australia’s banks are highly regulated, responsible and must maintain levels of cash in the event of a downturn in the economy. NAB (ASX: NAB) and Westpac offer great dividends, whilst the ANZ is anticipating more growth throughout its Asian expansion and CBA is a very safe stock.

Investors could do a lot worse than have a big bank in their portfolio for the long term but should carefully consider how much exposure they wish to have, given the lower Australian dollar and cash rate both reducing the amount of deposits needed to remain viable.

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ. 

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