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House price threat to bank credit

Date

James Eyers

Moody's says Australia's housing market is "finely balanced" and could become a risk to bank credit within a year.

Global ratings agency Moody’s has warned the appreciation of house prices at current rates could become a “credit negative” for Australian banks within a year.

In a “special comment” released on Wednesday, Moody’s said the 13 per cent increase in Australian house prices over the past 12 months was “not yet a threat to the credit profiles of Australian banks” and had “not been fuelled by excessive credit growth or a broad-based loosening of lending standards”. Annualised housing credit growth was around 5.5 per cent in March this year.

However, it added that housing ­market conditions were “finely ­balanced” and risks to the outlook were on the downside.

Moody’s said it was concerned about an acceleration of house prices outside Sydney, and was watching for ­competition on underwriting standards, which “could expose the banks to risks associated with lower-quality mortgage products”.

It also said it was watching stress levels in regional Australia as the economy moves away from resources sector investment-led growth, which could “raise the risk of localised downturns and adverse asset quality developments in less-diversified loan portfolios”. 

Moody’s has maintained its ­“stable” outlook for the banking sector and each of the big four banks also have “stable” outlooks.

Should the sector outlook change to “negative”, individual bank’s ratings would be likely to follow and funding costs increase.

Ilya Serov, vice president and senior credit officer at Moody’s, said: “Australian house prices have been rising ­rapidly in recent quarters, raising concerns with regard to their sustainability and the possible negative impact on the quality of Australian banks’ residential mortgage portfolios – as well as the ­stability of the financial sector more broadly.”

Moody’s warning comes at National Australia Bank reports its interim profit on Thursday, after Westpac and ANZ  delivered bumper profits in the past week. Australian housing accounts for around 60 per cent of bank credit commitments.

In a report on the Australian banks issued in February, rival ratings agency Standard & Poor’s said it expected ratings and outlooks in the banking sector to remain unchanged this year.





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