April 11, 2017 / 5:20 AM / 9 months ago

Four top-rated countries exposed to housing correction - Moody's

SYDNEY, April 11 (Reuters) - Australia was the most vulnerable of four top-rated economies to any shocks stemming from a housing downturn, ratings agency Moody’s Investors Service said on Tuesday, citing the country’s high and rising household debt as a risk factor.

The Moody’s report titled ‘Credit Profiles Resilient to Rising Household Debt and Stretched Housing Affordability’ focused on Australia, Canada, New Zealand and Sweden - all AAA rated countries where home prices and household debt have soared in the last three years.

The four countries were exposed to potential housing market correction, Moody’s said, but any reversal in home prices was unlikely to undermine the sovereigns’ credit profile, “unless accompanied by other long-lasting negative shocks.”

“Given its elevated level of household debt relative to disposable income and liquid household assets, Australia faces the risk that households would be forced to deleverage abruptly in an economic or housing downturn,” Moody’s noted.

“By contrast, large liquid financial assets in Canada and New Zealand would provide some financial cushion to economic shocks and reduce the risk of a sharp retrenchment in consumption.”

Over the last three years, home values in New Zealand and Sweden have surged 30 percent in real terms and by about 20 percent in Canada and Australia, according to Moody‘s.

Of the four, household leverage has increased at the fastest pace in Australia, at more than 10 percent. However, that is still much slower than nearly 50 percent in Ireland before the global financial crisis, and 40 percent in Spain.

Australian regulators, waking up to the risks, have recently tightened the screws on bank lending to speculative home investors and have threatened a lot of “monitoring”, “scrutinising” and “observing.”

Earlier this month, RBA governor Philip Lowe said regulators stood ready to take tougher action against rising debt, if needed.

Record high household debt to disposable income ratio is one reason the Reserve Bank of Australia (RBA) has held interest rates at a record low 1.5 percent after last cutting in August.

Besides, housing affordability is the new political buzzword in Australia with incessant local media coverage about skyrocketing home prices. The government has promised measures to boost supply at its federal budget on May 4. (Reporting by Swati Pandey; Editing by Shri Navaratnam)

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