Risks rise for Australian banks as house prices tick up

Will housing portfolios deteriorate?

The uptick in Australian home prices and rising household leverage will increase risks for Australian banks, according to a report by Moody's.

The report noted that these factors raise the banks' sensitivity to downside risk in the housing market, and
can lead to potential second-order impacts on broader economic activity.

Moody's cited data released by CoreLogic, which showed that the Australian housing market is showing signs of price growth after moderating in late 2015 and early 2016.

"These trends are unfolding against a backdrop of already high levels of household indebtedness, and elevated overall leverage in the economy," said. Daniel Yu, a Moody's Vice President and Senior Analyst.

Annual house price growth has risen over the past two months, increasing by 10% for the 12 months to May 2016. Sydney and Melbourne have led the rise.

"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," he added.

Nevertheless, strong employment conditions and low interest rates continue to support the quality of the banks' housing portfolios, Moody’s said.