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Risk of ‘sharp correction’ in Aussie house prices has increased, warns Standard & Poor’s

GLOBAL credit ratings agency Standard & Poor’s has downgraded the ratings of 23 Australian finance institutions, warning the risk of a “sharp correction” in home prices has increased.

The agency has slashed its rating on finance industry heavyweights including wealth manager AMP and second-tier mortgage lenders Bendigo & Adelaide Bank and Bank of Queensland.

While it has spared the nation’s big four banks in the sweeping downgrade, the S&P says it still has a negative outlook on the lending giants.

Analysts at the agency said they were concerned about a strong build-up in private sector debt over the past four years as well as the latest surge in property prices, especially in Melbourne and Sydney.

Melbourne prices have climbed 15.3 per cent in the year to April with the median price now at $650,000, while Sydney has increased 16 per cent, according to figures from CoreLogic.

 

S&P forecasts that by the end of next month, private sector debt in Australiawill have increased to about 136 per cent of economic output, measured by gross domestic product.

That compares with 117 per cent just four years ago.

“Consequently, we believe the risk of a sharp correction in property priceshas increased,” S&P wrote in note for investors.

“We consider that if this downside scenario were to occur, all financial institutions operating in Australia are likely to incur significantly greater credit losses than at present.”

The negative effects would be “amplified” by the nation’s persistent current account deficits and large amounts of offshore debt, it added.

However, S&P said the outlook for the banking sector remained “relatively benign by global standards”.

Efforts by regulators to tighten riskier lending practices should help slow the pace of house price growth or even result in a mild drop in prices over the next two years.

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AMP was downgraded from A+ to A, while both Bendigo & Adelaide Bank and BoQ were trimmed from A- to BBB+.

The move strips away a prized rating BoQ first attained in 2013, which the bank at the time said would increase both opportunities for funding and reduce its cost.

But the Queensland lender on Monday argued that rating drop had struck despite a “significantly lower level of exposure to the Sydney and Melbourneproperty markets than many other industry participants”.

The 190-branch lender further arced up about an anticipated “too big to fail” Government benefit received by its Big Four rivals. S&P kept credit ratings on the major banks untouched, saying it reflected “our expectation of likely timely financial support from the Federal government”.

BoQ argued this meant with its own rating falling, the “two notches of government support for these institutions has increased to three notches of benefit”.

However fellow Queensland institution Suncorp, whose bank has the benefit of being part of a big insurance business, remained an A+ rating.

Other institutions to cop a one-notch downgrade included Auswide Bank, Credit Union Australia, Defence Bank, Mecu, Members Equity, Rural Bank and Teachers Mutual Bank.

It is a fresh blow for the nation’s second-tier lenders in particular.

Those lenders are hoping to claw back market share from the majors as customers jump ship to avoid any potential fallout from the $6.2 billion levy — announced in the federal Budget this month — to be imposed on the nation’s five biggest banks.

Separately, S&P reaffirmed its ratings on Australia’s fifth biggest lender, Macquarie Bank, which is subject to the new bank tax alongside the Commonwealth Bank, Westpac, ANZ and National Australia Bank.

The ratings agency has upgraded its outlook on Macquarie’s investment bank parent, Macquarie Group, from negative to stable, leaving its rating at BBB — two notches above “junk” status.

 

S&P has consistently maintained that the nation’s four biggest banks could be expected to be bailed out by the government in the event of any large-scale financial crisis, meaning their credit ratings would move in concert with that of the sovereign.

The agency affirmed Australia’s triple-A credit rating last week, but pointedly maintained its negative outlook, meaning the nation remains at risk of a downgrade in just over a year.

All four big banks carry a AA- long-term rating and the same negative outlook afforded to the Australia.

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