Housing debt putting banks at risk

Adam Smith 15 July 2016

danger aheadA buoyant housing market and low interest rates may cause problems.

Ratings agency Moody’s has warned that Australia’s major banks are vulnerable to economic shocks, the Australian has reported. The agency said rising household debt as a result of surging property prices could combine with consistently low interest rates to make banks more sensitive to economic shocks.

“These headwinds could, over time, put pressure on the credit profiles of Australia’s major banks, particularly in the context of their very high ratings,” Moody’s vice president and senior analyst Frank Mirenzi said.

Moody’s said a combination of low income growth and rising house prices - particularly in the Sydney and Melbourne markets - have led to an increase in household debt.

“Coupled with bank portfolios that have unusually high levels of concentration to residential mortgages, Moody’s believes that risks to Australian banks are increasingly skewed to the downside,” Moody’s said.

The agency raised the question of whether the major banks could maintain their margins through further RBA rate cuts.

“If, at the same time, tighter housing loan underwriting criteria increase price competition for lower-risk loans, then bank margins may be squeezed and become increasingly sensitive to volatility in wholesale market funding costs,” Moody’s said.

The comments come after fellow ratings agency S&P changed Australia’s credit rating outlook from stable to negative.

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