One in three chance of strong growth triggering sharp correction in property: S&P

One in three chance of strong growth triggering sharp correction in property: S&P
One in three chance of strong growth triggering sharp correction in property: S&P

Standard & Poor's has placed 25 second tier Australian banks, insurers and buildings societies on negative watch as it becomes concerned about rising household debt and property values.

The change in ratings comes as the agency adjusted its assessment of Australia's economic risk trends from stable to negative. 

While S&P said that growth in debt and property prices would likely moderate, there was a one in three chance that the strong growth would continue, leading to increased risks of a sharp correction that would hurt lenders. 

Among the largest institutions impacted are AMP Bank, Bank of Queensland, Bendigo and Adelaide Bank, Macquarie whose current ratings were placed on negative outlook.

Several other building societies and regional lenders such as Cuscal and CUA also had their ratings outlook revised to negative.  

The ratings outlooks of the major banks had already been placed on negative outlook because of the action taken on the AAA Australian sovereign rating.
 
S&P said that private sector debt as a percentage of GDP had grown to 139 per cent  to 118 per cent in 2012, an average increase of 5.2 per cent while property prices had increased by 5.3 per cent, after adjusting for inflation.   

"Strong growth in private sector debt (to about 139 per cent of GDP in June 2016 from 118 per cent in 2012, or an annual average increase of 5.2 percentage points) coupled with an increase in property prices nationally (average inflation-adjusted increase for the past four years was 5.3 per cent nationally) are driving the potential increase in imbalances in the economy, in our view.

"Consequently, we believe the risks of a sharp correction in property prices could increase and if that were to occur, credit losses incurred by all financial institutions operating in Australia are likely to be significantly greater; with about two-thirds of banks' lending assets secured by residential home loans--the impact of such a scenario on financial institutions would be amplified by the Australian economy's external weaknesses, in particular its persistent current account deficits and high level of external debt."

The impact of any sharp drop in property prices would be greater on banks, because more than 60 per cent of their loans were for residential property, it said.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

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