The ratings agency has warned that measures announced by the government to improve Australia’s housing affordability problem will not fix the “build-up of latent risks” in the housing market.
In a research report released yesterday, Moody’s Investors Service explained that risks in the housing market have been rising in recent years as significant house price appreciation in the core housing markets of Sydney and Melbourne have led to “very high and rising household indebtedness”.
“The rise in household indebtedness comes against the backdrop of low wage growth and structural changes in the labour markets, which have led to rising levels of underemployment,” the report said.
“Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest-only and investment loans are all indicators of rising risks.”
Moody’s warned that home loan borrowers are more vulnerable to a change in financial conditions, increasing the risk of loss in banks’ residential mortgage portfolios.
The government announced eight key policy initiatives to improve Australia’s housing situation, including assistance for first home buyers, allowing older Australians to contribute downsizing proceeds into their superannuation and establishing a $1 billion infrastructure fund.
The most controversial measures announced by government have been those targeting the banking system, in particular the deposit levy aimed at Australia’s four major banks and Macquarie.
Moody’s estimates that the levy would reduce the banks’ pre-tax profits circa 3.8 per cent.
“This levy comes at a time when bank earnings and profitability are already facing multiple headwinds from moderate credit growth, low interest rates, strong price competition for new business, rising capital requirements and the potential for rising credit costs,” Moody’s said.
“Furthermore, as a result of other measures announced within the budget, such as the introduction of a residential mortgage pricing inquiry, banks may not be able to pass the additional costs of this levy to bank customers. This development thus challenges the traditionally very strong pricing power that has been a feature of the system’s major banks.”