Housing bust tops China hard landing as biggest threat to the economy: Fitch survey

Fixed-income investors say housing is now a bigger cause for concern than China, according to a Fitch survey.

Apartment towers in Melbourne’s Southbank precinct. (Picture: Rob Leeson)

The nation’s largest fixed-income investors have shifted their view on the greatest risk factor for the local economy, labelling a housing market downturn as the primary threat ahead of any potential hard landing in China.

A Fitch Ratings and KangaNews survey of managers with over $300 billion of fixed-income assets — around three-quarters of the local real-money market — ultimately downplayed the prospect of an imminent crash despite pinpointing housing as a growing risk.

Just 4 per cent of the money managers surveyed tipped house prices to tumble by over 10 per cent by mid-2019, largely due to confidence around low unemployment and interest rates.

“At the same time, a string of regulatory initiatives, coupled with active supervision have added starch to bank underwriting standards,” Fitch noted.

However, banks’ growing exposure to residential property has raised the risks that should a shock eventuate, the economy could face significant distress.

“Investors also identified property market exposure as the greatest risk to bank credit quality over the next 12 months, and financials as the asset class facing the greatest refinancing challenge,” Fitch said.

“These concerns are evident in a low expectation for increased issuance out of structured finance (RMBS, ABS) and covered bonds.”

Investors are increasingly confident around corporate credit conditions, in contrast, although many expect businesses to avoid significant investments in their businesses to appease shareholders demands for capital management programs.

“They … believe Australian corporates will continue to show little appetite for using cash on capex. Over 80 per cent think cash is more likely to be used to appease shareholders, or will simply be retained,” Fitch said.

Money managers are also cautious on the potential for widening spreads, making the search for yield “elusive” over the next 12 months.