Rapid house price rises and a spike in investor loans are increasing the risk of a housing market correction, warns a major ratings agency.
According to ratings agency Moody’s, the risks in Australia's housing market risks are “skewed towards the downside”.
While the research suggests that stability in the housing market will be supported by low interest rates and strong bank balance sheets in the short run, rising house prices are “intensifying imbalances in the housing market”. Since the start of the interest rate cutting cycle in November 2011, Australian home prices have risen by 23%.
Rapid house price rises mean that affordability is falling, despite the low interest rate environment. Similarly, lending imbalances, including a decline in the proportion of first-time home buyers and a sharp rise in residential investment activity, pose a further source of risk, according to the ratings agency.
Ilya Serov, a Moody's vice president and senior credit officer says this could pose long-term challenges to Australian banks. However, he believes Australian banks are well-positioned to adjust their origination practices and capital levels to respond these risks.
“We expect that over time the banks will revise up their mortgage risk weights and capital levels to better recognize the rising tail risks embedded in their housing portfolios,” he said in a research note.
The Moody's research says likely regulatory changes will see average mortgage risk weights for the major banks in Australia increase to the 20%-25% range, up from the current 15%-20%.