Ratings agency Standard & Poor’s has warned on the ramifications of greater access to credit for Australian housing, saying it could risk a “disorderly correction” in property prices.
In a submission on the Financial System Inquiry’s interim report, the agency also spoke out against ‘bail-in’ provisions for banking creditors, and questioned the benefits of allowing authorised deposit-taking institutions to adopt IRB risk weights.
But the risks of a credit inflow into the housing market could threaten the broader economy, it warned.
According to S&P, greater access to housing credit may put further strong upward pressure on house prices and “increase the risk of a disorderly correction in property prices down the track,” hurting growth and risking financial instability.
“More credit for housing is non-productive: it is channeled to existing, rather than new, housing and puts upward pressure on asset prices,” the submission said.
Any economic shock would be exacerbated by the already high leverage levels in the household sector, S&P said.
And housing affordability would also be further hurt by increased credit access, it added.
Meanwhile, the agency warned on the introduction of ‘bail-in’ provisions for senior banking creditors, saying it could affect S&P ratings on the big four, and more broadly lead to, or exacerbate, “a range of disorderly adjustments in the Australian economy.”
“In particular, we believe Australia could find it challenging to effect an economic recovery in circumstances whereby a key source of funding upon which the recovery would likely depend -- senior unsecured creditors -- had been ‘bailed in’ during the downturn,” the submission said.
European regions where bail-in clauses are more strongly advocated differ from Australia in their lower reliance on senior unsecured wholesale funding for banks, the major role of covered bonds in bank funding (which are excluded from bail-in provisions), and the injections of government equity into the banking system (which has influenced discussions), it noted.