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The new housing bubble threat to ASX banking shares that isn’t from Australia

The threat of a popping housing bubble in this country has receded substantially but worries about another over-heated housing market could haunt the big four ASX banks.

The countries most at risk of house price correction are Canada and New Zealand, according to a Bloomberg report.

That’s bad news for the Commonwealth Bank of Australia (ASX: CBA) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price, Westpac Banking Corp (ASX: WBC) share price and National Australia Bank Ltd. (ASX: NAB) share price.

A Kiwi cut to earnings?

This is because our big banks have substantial operations in New Zealand and their earnings could be hit in two ways.

The obvious impact from a house price correction is borrowers defaulting or going into negative equity. The other issue is cash buffer.

The Reserve Bank of New Zealand (RBNZ) is contemplating forcing lenders to hold more capital on their balance sheet to protect the banking system and broader economy from the risks of a housing market crash.

The report from Bloomberg could add pressure to the RBNZ to make greater demands from our big banks, which would impact on profit if they had to hold significantly more cash as that will limit their ability to lend.

Why New Zealand housing is at risk

The risk posed by New Zealand’s residential market is significant, if Bloomberg’s analysis is on the money. Bloomberg’s economists have built a “housing bubble dashboard” looking at ratios of house prices to rent and income, as well as inflation-adjusted prices and household credit.

The dashboard identified New Zealand as having the worst house price-to-income ratio and the second worst house price-to-rent ratio. In case you are wondering, Australia is fifth on the list.

The New Zealand government is attempting to manage the risks by banning foreign buyers but falling interest rates could help inflate the perceived bubble.

Foolish takeaway

This puts the RBNZ in a bind. The central bank is under pressure to follow its counterpart in Australia in cutting rates deeper for longer. The official rate across the Tasman is 1.5% while the market is betting that the Reserve Bank of Australia (RBA) will make another cut to bring our cash rate to half what it is in New Zealand.

This puts the RBNZ in a bind and that’s why it could feel compelled to take a harsher stand on capital adequacy ratios for our big banks than it normally would.

I don’t believe this risk is fully priced into big bank shares, which have been lagging the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index since the start of this calendar year.

Who would have thought Kiwi house prices could end up being a bigger threat to ASX bank dividends than Aussie home prices!

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, and Westpac Banking. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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