Lenders at risk if housing prices continue to soar, warns S&P

Lenders face a one-in-three chance of a ratings downgrade within two years if housing prices continue to soar.

Pedestrians walk past the Standard & Poor's Financial Services LLC logo, displayed outside of the company's headquarters in New York, U.S. (Photographer: Scott Eells/Bloomberg)

Standard & Poor’s has trimmed the outlook for 25 Australian lenders to negative amid developing concerns around swelling house prices and high private sector debt.

In a statement this morning, the ratings agency warned any further build-up in house prices from its base case of moderating growth for the next two years would raise the threat of a “sharp correction”.

“Our base-case scenario remains that the growth in property prices and private sector debt will moderate and remain at relatively low levels in the next two years,” S&P said.

“However, in our alternative case, we assess that there is a one-in-three chance that the strong growth trend will resume and economic imbalances will continue to build, which in our view would increase the risks that a sharp correction in property prices could occur.

“In that event, credit losses incurred by all financial institutions operating in Australia would be significantly greater.”

Around two-thirds of banks’ lending assets are secured by residential home loans, highlighting the threat of a sharp downturn in prices.

At this stage, the ratings agency foresees a potential apartment glut in key regions as well as tightening lending standards keeping house prices in check, but a perceived one-in-three chance of a growth trend re-emerging in the next year has stirred anxiety.

“In our view several other important factors that have supported the past trend are likely to persist, including low interest rates, a relatively benign economic outlook, and an imbalance between housing demand and supply; in addition, Australian banks could possibly target higher lending volumes to offset pressures on their earnings growth,” S&P said.

“We would see a resumption or continuation of this trend as indicative of a continued buildup of economic imbalances, posing greater risks to all financial institutions operating in Australia.”

According to the ratings action, the 25 institutions in question, which include Macquarie, Bank of Queensland, Bendigo and Adelaide Bank and AMP, are seen as having a one-in-three chance of a ratings downgrade within two years.

Australia’s big four banks were not included among the 25 as they are already on negative watch, in line with the Federal Government.

S&P also hinted the backlash against the big banks could dampen the prospect of the Commonwealth stepping in to prop them up if necessary, although government support in extreme circumstances is still seen probable.

“The Australian government remains highly likely to provide timely financial support to the systemically important private banks in the country, if needed,” the ratings agency said.

“Nevertheless, we now consider that there is a one-in-three chance that within the next two years, we will revise our assessment of government supportiveness to ‘supportive’ from the current ‘highly supportive’.”

The full listing of 25 institutions includes: AMP Bank, Australian Central Credit Union, Auswide Bank, Bank of Queensland, Bendigo & Adelaide Bank, Big Sky Building Society, Community CPS Australia, Credit Union Australia, Cuscal, Defence Bank, Fisher & Paykel Finance, G&C Mutual Bank, Greater Bank, IMB, Macquarie Bank, Macquarie Financial Holdings and Macquarie Group, Macquarie International Finance, Mecu, Members Equity Bank, Newcastle Permanent Building Society, Police Bank, QPCU, Rural Bank and Teachers Mutual Bank.