Reinvigorated house price growth is leaving the Australian housing market and broader economy at risk, a ratings agency has cautioned.
In its report, House Price Growth is Increasing Tail Risks for Australian Banks, Moody’s Investors Service said signs of a re-acceleration in Australian house prices and increasing household leverage raise the banks’ sensitivity to downside risk in the housing market, and can lead to impacts on broader economic activity.
Data released by CoreLogic this month show that the annual rate of house price growth across the combined capitals has rebounded to 10%, after experiencing a trough in December last year at 7.4%.
But at the same time, according to Moody’s, household debt to income ratios continue to rise.
"These trends are unfolding against a backdrop of already high levels of household indebtedness, and elevated overall leverage in the economy," Daniel Yu, a Moody's vice president and senior analyst said.
“The current trends are therefore credit negative for Australian banks, particularly in the context of the banks' high ratings, because these trends raise the banks' sensitivity to any potential deterioration in the housing market.”
The re-acceleration in Australian house prices may be driven by increased bank appetite for investor lending, after a period of tighter underwriting to comply with APRA’s 10% annual growth limit.
A number of lenders have recently lifted their maximum LVRs for investor lending or announced interest rate cuts on investment lending.
CoreLogic head of research, Tim Lawless, has also suggested investors may be behind the jump in Sydney house prices.
He said investors now comprise of 47.6% of all new mortgage commitments, which is the highest proportional reading since August last year.
Overall, however, arrears rates remain very low, according to Moody’s, even though risks in Australia's housing market are skewed to the downside.