The high level of credit exposure to residential properties poses as a “natural red flag” to Australian banks, which have accumulated about 60 per cent of housing credit in their portfolios, global ratings agency Standard & Poor’s warns.
“If mortgage-repayment pressures and/or a broader retrace in residential property prices… was to emerge, we would expect negative rating pressures to emerge across Australia’s banking system,” S&P said in a report on Wednesday, noting the scenario was likely to come with high unemployment and slower growth.
Lending has surged in a booming housing market where Australia’s house prices have jumped over 10 per cent nationwide in 2013, with the biggest cities, Sydney and Melbourne, surging even more in some popular suburbs.
“We believe strong property price growth over the past year or so has been indicative of a resurfacing of risk within Australia’s housing market,” S&P said.
The recent surge in prices has been driven by increasing investor participation in the market in response to record low interest rates, S&P said, which have been “translated by some households into a self-reinforcing feedback loop” and therefore push up demand on the back of increased leverage.
The high leverage mixes with slower wage growth and soft employment prospects, which prompts S&P to believe some households which have recently entered the market will find it hard to repay their mortgage down the track.
“In our opinion, the risk is that mortgage repayments become an increasing problem for some households, particularly those recently entering the housing market, when interest rates begin to rise. A further shock to national income growth could also weigh on labour market conditions and add to the mortgage repayment pressures of some,” the agency said.
However, S&P still believes Australian banks are “generally well placed” to deal with any risks that might emerge in response to mortgage-repayment pressures.
Australian banks are “well-capitalised by international standards”, the agency said, adding home owners have some sort of “buffer” against higher interest rates.
“Australian banks typically apply an interest rate buffer anywhere up to two percentage points as part of their underwriting, which should ensure many recent entrants are afforded some headroom to absorb a rising interest rate environment, although slowing income growth may negate this somewhat,” S&P said.
(Reporting by maggie.lu@businessspectator.com.au)