Ratings agency warns of property correction

by Julia Corderoy15 May 2015
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%.
 

COMMENTS

  • by Regional Broker 15/05/2015 10:18:08 AM

    Ahhh!!!! Moody's again, the people who AAA Rate Mortgage backed bonds before the GFC, that were really junk Quality, something that is still being addressed by the courts and FBI in the US, I will not take any notice of this agency, for me no credibility.

  • by City Broker 15/05/2015 2:20:01 PM

    I am not surprised at Moody's prediction. One would need to be totally inexperienced not to be mindful of a likely property correction. I don't think it will be big and fast, but there will be a drop and then a steady price level for several years. There are signs everywhere that this is likely.