Banks warned of growing housing market risks

According to the credit ratings agency, these factors are “credit negative” for the banks because of their sensitivity to downside risk in the housing market and “can lead to potential second-order impacts on broader economic activity”.

Moody’s pointed to recent CoreLogic data which revealed that after moderating in late 2015 and early 2016, Australia’s housing market is showing signs of re-acceleration led by strong price growth in Sydney and Melbourne during April and May.

At the same time, the agency said household debt is continuing to rise.

“These trends are unfolding against a backdrop of already high levels of household indebtedness and elevated overall leverage in the economy,” Moody’s vice president and senior analyst Daniel Yu said.

“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.”

Moody’s also said there is evidence the banks’ appetite for investor lending is returning following a period of tighter underwriting to comply with APRA’s 10 per cent annual growth limit.

“Over the past month, a number of lenders have lifted their maximum loan to value ratios for investor lending and there are indications that the banks are becoming more competitive in their pricing for investor loans,” it said.

“Moody’s notes, however, that some of the newer lending activity can be explained by investors bringing their purchase plans forward, ahead of the federal election on 2 July 2016.”

The agency said overall mortgage arrears rates remain “very low” despite Australia’s housing market risks being “skewed to the downside”, adding that macroprudential measures introduced in 2015 have helped to firm underwriting standards.

“However, the effectiveness of such measures in fully offsetting upward pressure on housing prices remains to be seen,” Moody’s said.

[Related: More lending curbs on the horizon as prices bounce back]