While the strong capital levels of the Australian banks would provide a buffer in the event of a sharp housing correction, there would be “meaningful negative impacts” on bank earnings and asset quality, says Moody’s Investors Service.
In a new report on the “increasing tail risk” of house price growth for Australian banks, Moody’s described the already high level of household indebtedness as a “credit negative” for Australian banks.
“Whilst current stable employment conditions and low interest rates support the quality of bank housing portfolios, high housing prices and consumer leverage do raise the sensitivity of the banks to downside risk in the housing market,” said the report.
House price growth in Australia has picked up again in Sydney after slowing in late 2015.
“The current rebound comes against a backdrop of already very high house prices and elevated overall leverage in the economy,” Moody’s said.
“These developments are credit negative since they increase the sensitivity of Australian banks to any potential deterioration in the housing market. And although we expect such an adjustment to be gradual, the likelihood of an outright downward correction in prices is rising,” it said.
The strong pipeline of new apartment supply in Sydney and Melbourne could force prices down in the medium term.
“While the banks’ healthy capital levels and current average [loan to value ratios] provide some buffer against any potential direct credit losses from their housing portfolios, a sharp correction in housing prices would be likely to have meaningful, negative second order impacts on economic activity, and therefore on the earnings and asset quality of banks themselves, as seen in the downturns of other developed economies,” Moody’s said.
“Furthermore, Australian banks are reliant on wholesale funding markets. Wholesale debt funds 34 per cent of rated banks’ tangible banking assets, with around half of their wholesale funding being sourced from abroad.
“The strong performance and balance sheets of Australian banks have, to date, supported their ability to access global wholesale funding markets. However, foreign investor confidence may be tested if signs of a meaningful housing correction start to emerge in Australia,” Moody’s said.