SYDNEY - Australia's banks have the world's highest exposure to home mortgages and have been warned to rein in lending to avoid a crisis caused by falling property prices.
The warning was sounded in a new report by Moody's Analytics, which said Australian home prices are overvalued and present a "major concentration risk" for the nation's banks. The report said home prices are most likely to fall slowly, but a crash remains a possibility.
It said home loans make up 65 per cent of Australian bank lending, compared with 35 per cent in the United States and less than 20 per cent in Germany and Britain.
The report likened Australia's property market to the overhyped mood in the US before its mortgage crisis in the mid-2000s and said that a strong correction would be dire for Australian banks. "It would take a bold economist... to declare that an Australian housing correction was impossible."
Australia has a "banking oligopoly", with about 85 per cent of the A$1 trillion (S$1.14 trillion) in mortgages controlled by the country's top four banks.
They have been the world's most profitable for the past three years and have reaped a bonanza from their hold on the mortgage market. The four are due to make a collective profit of A$26 billion this year.
According to figures for May released by Australia's banking regulator, the country's biggest bank, Commonwealth Bank, has a mortgage book worth A$320 billion, followed by Westpac (A$297 billion), NAB (A$196 billion) and ANZ (A$178 billion).
However, most analysts believe the country is not experiencing a housing bubble, though the issue remains hotly contested. Property prices have been largely stagnant since their peak in 2010 but had soared in the preceding two decades.
The growth, particularly from 1996 to 2010, far exceeded global norms. In the past year, prices have risen 2.6 per cent but this is believed to have been due in part to growing demand from Chinese and foreign buyers.