‘The likelihood of an outright house price correction is rising’

‘The likelihood of an outright house price correction is rising’

19 May 2015 by Nick Bendel 1 comments

Rising house prices and deepening housing market imbalances are increasing the risk of a housing crash, Moody’s has warned.

Declining mortgage affordability is one of the main risk factors, according to the credit rating agency.

Moody’s noted that despite low interest rates, the share of income that households use to make their mortgage repayments is increasing, to 27 per cent nationally and a record 35 per cent in Sydney.

Aggregate housing debt levels are also at an all-time high of 140 per cent of disposable incomes.

“High levels of household indebtedness further exposes the economy to the risk of a sharp house price retrenchment,” according to Moody’s.

“Both historically and in comparison to other OECD countries, Australian borrowers’ vulnerability to economic shocks is elevated and unprecedented.”

One looming problem is the way in which low housing affordability has distorted the market, with investment lending sharply rising and interest-only loans at historical highs.

Moody’s said this suggests banks' loan portfolios are deteriorating and means they may be setting themselves up for credit problems, even though record low interest rates are keeping things stable for now.

“In the long run, however, addressing affordability imbalances will necessitate house price growth more commensurate with income growth,” it said.

“While we expect such an adjustment to be gradual, execution risk is significant and the likelihood of an outright house price correction is rising.”

Moody’s warned that Australia’s mortgage sector could prove to be far weaker than believed should a downturn arrive.

Mortgage delinquencies are currently low, but these are expected to deteriorate if interest rates return to historical averages, according to Moody’s.

Moody’s said the increasing proportion of investment loans and interest-only loans is also likely to lead to structurally higher levels of delinquency.

Another issue is that Australia’s 25 years of continuous economic growth may have distorted the historical data that banks use to calculate how much capital to hold, Moody’s said.

Moody’s pointed to the downward trend of mortgage risk weights over the past five years, which it said was hard to justify given the “building tail risk in the housing market” and that the quality of mortgage origination had remained largely unchanged during that time.

[Related: Reserve Bank says major downturn may be coming]

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