High household debt risky for banks: Moody’s

By Killian Plastow

19 July 2016

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Low interest rates and rising household debt are placing pressure on major banks and skewing risk to the downside, according to Moody’s Investors Service.

In a new report, the credit ratings agency warned that the low interest rate environment is leading to increased exposure to housing, and noted that since 2008, major banks had “raised their share of lending to housing” in the face of slackening business lending growth.

“The prospects of a longer period of low interest rates may direct even more bank credit to the housing market, making banks increasingly sensitive to shocks in this segment and at a time when adjustment risks are rising,” Moody’s said.

In the report, Moody’s highlights a “growing disconnect” between housing prices and average household incomes, noting that the higher levels of household leverage pose “increasing tail risks for Australian banks”.

“Australia’s credit conditions and housing risks are starting to pose increasing challenges,” the report said.

Moody’s also pointed to “cyclical challenges” in the labour market, such as part-time employment “outpacing” full-time, putting increased pressure on household debt.