Banks exposed to "credit negative" risk from housing, warns Moody's

A resurgence in Australian real estate prices and rising household debt are becoming a greater risks for the nation's banks, according to the Moody's credit ratings agency.

Moody's warns the two factors raise bank sensitivity to potential "downside risk" in the reheating housing market with potential implications for the wider financial system.

Listen to my interview with Moody's senior vice president Ilya Serov 

Moody's says increasing leverage through housing could be "credit negative" for banks, despite currently strong employment conditions and an economy supported by low interest rates.

A contributing factor to the housing concerns is the Reserve Bank's decision to cut the cash rate to 1.75 percent in May, according to Moody's senior vice president Ilya Serov.

"The housing market in Australia appears to have accelerated over the past couple of months partly on the back of the cut in interest rates that we've seen in May," Mr Serov told The World Today.

"We are already in an economy which is characterised by fairly high levels of debt particularly in the household sector and the debt to income ratio which had been stable is now creeping up again."

Mr Serov says although interest are at record lows and likely to get lower, investors are exposed if the RBA moves or banks hike rates independently.

"The economy from a household sector perspective is more sensitive to increases in interest rates should they occur," Mr Sherov said.

While an imminent shock to the housing sector is unlikely, Mr Sherov said there could be broader macroeconomic effects that would rattle the financial system if the worst case scenario unfolds.

"It would most likely effect consumption, therefore households and how much money people are prepared to spend on durables such as white goods and car which are typically linked to how well the value of their house is going," Mr Serov said.

"I think the housing market in Australia is interlinked with economy very much so it would be difficult to separate  the two in that kind of adverse unlikely event."

The Moody's warning comes after data released last week by CoreLogic showed signs of house price acceleration in early 2016 despite a moderation late last year.

The Reserve Bank has also warned that banks are potentially exposed although intervention from the prudential regulator APRA (Australian Prudential Regulation Authority) appears to have tamed investor appetite.

Data released yesterday by the ABS showed investor housing finance fell by five percent in April.

However, Moody's Ilya Serov says there are signs that the APRA pressure has some way to go.

"It's particularly challenging in the context of declining interest rates. To that extent always when interest rates drop some housing activity reaccelarates and I think that's what we're seeing here."