Too early to hail APRA moves a success: Moody's

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A global credit rating firm believes signs of renewed capital growth in Australian real estate could bring danger for the country’s banking sector and broader economy.

While investors and home owner were likely buoyed by recent market analysis that showed stronger than expected price growth in a number of Australian markets over recent months, Moody's Investors Service said that combined with rising household debt to income ratios could spell trouble.

"These trends are unfolding against a backdrop of already high levels of household indebtedness, and elevated overall leverage in the economy," Daniel Yu, a Moody's vice president and senior analyst said as the rating firm released a new report, House Price Growth is Increasing Tail Risks for Australian Banks.

"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," Yu said.

Moody’s said some of the risks associated with continued strong price growth had been mitigated by Australian Prudential Regulation Authority’s (APRA0 push to slow investor lending, however it is too early to label those moves a complete success.

“Macroprudential measures introduced in 2015 have helped to firm underwriting standards,” Moody’s said

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

Moody’s also noted that a number of lenders have recently begun to ease some of the measures they had implemented as a result of the APRA mandate.

Two of Australia’s biggest lenders, Westpac and the Commonwealth Bank, have recently announced changes to loan to value ratios and cuts to interest rates for investors.

The concerns form Moody’s come just a week after the Organisation for Economic Co-operation and Development (OECD) warned the Australian housing market was at risk of “dramatic and destabilising developments".

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