Moody's concern at 2016 house price re-acceleration
Moody's Investors Service says that signs of a re-acceleration in Australian house prices are credit negative for Australian banks and pose a risk to the economy.
The 2016 spurt had raised the banks' sensitivity to downside risk in the housing market.
"The likelihood of an outright downward correction in prices is rising,” the agency advised.
Moody’s Investors Service viewed loans taken out over 2014-15 as “bearing the most risk, given that they were originated after significant house price appreciation had already occurred”.
While noting strong employment conditions and low interest rates continue to support the quality of the banks' housing portfolios, the household debt/income ratios continue to rise.
Moody's conclusions are contained in its report, "House Price Growth is Increasing Tail Risks for Australian Banks".
Annual house price growth has risen over the past two months, increasing by 10 percent for the 12 months to May 2016. Moody's says that there is evidence the banks' appetite for investor lending is returning, after a period of tighter underwriting to comply with the Australian Prudential Regulation Authority's 10 percent annual limit for growth in such loans.
Moody's points out that over the past month, a number of lenders have lifted their maximum loan to value ratios for investor lending, and there are indications that the banks are becoming more competitive in their pricing for investor loans. Moody's notes, however, that some of the newer lending activity can be explained by investors bringing their purchase plans forward, ahead of the federal election.
"These trends are unfolding against a backdrop of already high levels of household indebtedness, and elevated overall leverage in the economy," says Daniel Yu, a Moody's Vice President and Senior Analyst.
"The current trends are therefore credit negative for Australian banks, particularly in the context of the banks' high ratings, because these trends raise the banks' sensitivity to any potential deterioration in the housing market," Yu suggested.
According to Moody's senior vice president Ilya Serov, the housing market in Australia appeared to have accelerated over the past couple of months partly on the back of the cut in interest rates in May.
Mr Serov told he ABC's The World Today investors were exposed if the RBA moves or banks hike rates independently.
"The economy now I think from a household sector is more sensitive to increases in interest rates should they occur," Mr Sherov said.
"We are already in an economy which is characterised by fairly high levels of debt particularly in the household sector and the debt to income ratio which had been stable is now creeping up again."