Banks are stuck between a property rock and a hard place: Gottliebsen

If you have to sell a house in large chunks of Melbourne, Sydney and Brisbane then you may have to discount it by more 10% over peak values.

And in Melbourne bargain hunters are looking to snap up distressed sales at between a 25% and 30% discount.

The number of people seeking relief from mortgage payments is rising sharply. Australian banks were the major cause of the housing boom and if they make a false move they risk bringing on a crisis in which they will be the major losers.

The most publicised reasons for the fall in the dwelling market have been the rise in interest rates, fewer overseas buyers, the increase in power, petrol and other costs. But ranking with those forces has been a rapid and severe tightening of bank credit. Whereas before banks would lend up 105% on an investment dwelling, now those loans are not available and banks are being much more careful who they lend to and how they apply lending criteria. Accordingly, it can take borrowers weeks to get a decision that would once be made in hours.

If the banks were to continue the current tightening then it is highly likely that the market would fall between another 5% and 10%, given that bank credit plays such a large role in determining the level of dwelling prices.

However, not all hope is lost. In the Fairfax media this morning there is good news, with reports that the banks are now discounting their loans and increasing their property ratios.

But what banks say they are going to do and what they actually do in the marketplace can be different, but these reports indicate that the banks have been listening to commentators like me.

The banks, having pushed the market up, cannot afford to let it fall too far or they will suffer very large losses, particularly if the current decline in non-mining economic activity in the major capitals causes unemployment to rise.

Nevertheless, although they are trapped, it takes great courage for the banks to lower lending standards and cut prices on a falling market because if there is a further economic downturn then your losses may compound. In addition there is a prospect of an overseas crisis that leads to much higher costs of overseas wholesale funding of our banks.

This article first appeared on Business Spectator.