Correlation is not causation

Not that there’s a banking crisis in Australia, at least not yet. There may not even be a problem. Heck, there may not even be any stress. But we’ll find out soon if there should be!

Wire services are reporting that ratings agency Fitch is ready to stress test Aussie banks for a 40 per cent fall in house prices. Since Australian house prices never fall, Fitch probably won’t find anything. But it’s going to look anyway.

The agency is going to design something that tests, “different scenarios of varying property price decline”. What that means is it wants to see if falling house prices or rising mortgage default rates (that could never happen either, even if interest rates went up, which they never do) impact banks and insurers negatively (also probably impossible).

What prompted the stress test of an asset class/market that is immune to stress? Fitch says that, “Weighted average established house prices for Australia's eight major cities rose by 18.4 per cent in the year to June 2010 according to the Australian Bureau of Statistics, and are now 41 per cent higher than they were in June 2006.”

Rising prices don’t always indicate a bubble. But sometimes they do. And since we’ve already established our position on this issue, we’re going to shut up about it now.