Global ratings agency Fitch Ratings will conduct several stress tests on Australian banks so as to determine what is likely to happen if mortgage defaults rise as much as eight percent and property prices slump by 40 percent.

Fitch managing director for Australia Ben McCarthy said, “Over the last few months, Fitch has received numerous enquiries as to the sustainability of Australian residential property prices and the possible impacts of a correction... While over the short-to-medium term, a downturn is not Fitch’s central expectation, the agency is performing its stress test exercise on ratings impact under the hypothesis of an imminent housing market correction.”

The tests will determine the impact of various levels of price declines on Fitch’s Australian residential mortgage-backed securities portfolio, banks, and mortgage insurers. Results, the ratings company said in a statement, will be completed by the middle of the fourth quarter.

For months, investors have been cautious of a property market bubble even as Australian banks and analysts continue to downplay the issue. News of the stress test pulled down investor confidence further giving bank shares a sudden dip yesterday afternoon.

The largest holders of residential property portfolios such as Commonwealth Bank and the Westpac group slightly suffered a decrease of not less than one percent in the prices of its shares.