Australia:No sharp correction to house prices coming but debt risk growing, says S&P

There will not be a sharp correction to Australian house prices any time soon, according to ratings agency S&P Global.

But there is a risk from growing household debt which has reduced breathing space if the economy deteriorates or if interest rates increase.

S&P says that there is unlikely to be a sharp drop in property prices, but that mortgage debt could be a risk if the ...

S&P says that there is unlikely to be a sharp drop in property prices, but that mortgage debt could be a risk if the state of the economy changes. Photo: Fiona Morris

The assessment comes from S&P analysts Craig Parker and Graeme Ferguson in a report on real estate investment trusts (REITs) in the Asia-Pacific region.

“We don’t anticipate a sharp correction in house prices in the near term,” the report says.

“However, a scenario of the early 1990s where, unemployment reached 11 per cent would place households under severe financial stress.”

How severe that stress is would depend on the speed and depth of the economic downturn, the analysts say.

Debt climbing

The report says total consumer debt has increased “materially” as a percentage of household assets, which was fuelled partially by the increase in house prices, creating some risk.

“The rising household debt has lowered the headroom if the economy were to deteriorate or when interest rates rise,” it says.

The analysts say loss of income is the key cause of Australian borrowers defaulting on mortgages.

While S&P does not see a property slump as the most likely scenario, any severe downturn in the housing market would have a major impact on the country’s big banks.

About 60 per cent of the Big Four’s loans are for residential property.

S&P analyst Sharad Jain said the ratings agency was closely watching the mortgage market after a recent run-up in house prices, but the major banks’ lending standards remained “very conservative.”

“Our base case is not for a sharp correction, our base case is that it should slow down at some stage and then possibly unwind,” he said at a conference in Sydney.

S&P is just the latest finance industry player to weigh in on whether or not Australia is heading for a painful housing price correction.

The Organisation for Economic Co-operation and Development (OECD) warned earlier this month that a sharp rise in apartment construction could lead to a “dramatic and destabilising” end to the housing boom.

The Reserve Bank has also raised concerns of an apartment glut, while forecaster BIS Shrapnel says it is “an accident waiting to happen”.

Mr Jain said Commonwealth Bank, Westpac, National Australia Bank and ANZ Bank  had “limited” exposure to the apartment building boom, as a large share of these units were funded by cashed-up developers or overseas banks.

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