This article is from the Australian Property Journal archive
AUSTRALIA has maintained its AA+ rating but a sharp fall in house prices would have a negative impact on the financial system, according to Fitch Ratings.
Fitch Ratings’ analyst and director of Asia Pacific Sovereigns team Art Woo said the outlook for Australia is stable.
“Australia’s ratings are supported by strong public finances that are in turn underpinned by: long-standing fiscal prudence; a relatively robust recent macroeconomic performance, in part reflecting the authorities’ ability to implement discretionary policy stimulus; and some of the strongest public institutions and governance among Fitch-rated sovereigns,” he added.
However, the ratings remain constrained by Fitch’s concerns regarding a build-up of macro-prudential risks relating to a long-running boom in the housing market, and the high level of net external indebtedness, which is largely held by the banks.
According to Fitch, Australia’s household debt/disposable income ratio rose to 159% at mid-2010.
“Attention on this issue has been magnified by downturns in housing markets in a number of countries, including Ireland, Spain, the UK and the US.
“Although Fitch’s research suggests that the banking sector looks well prepared to cope with a sharp decline in housing prices, should it occur, this type of downside shock, particularly if accompanied by an economic downturn, would have a negative impact on Australia’s financial system,” Woo warned.
However, he acknowledges recent evidence of a moderation in the housing market, with house prices remaining roughly flat over the past six months in Australia’s capital cities.
Woo said if this trend persists, it would begin to address Fitch’s concerns over banking sector risks for the sovereign credit profile and support the case for an upgrade of Australia’s foreign currency Issuer Default Rating.
“In addition, a sustained improvement in the current account position, along with a moderation in net external liabilities (as a proportion of GDP) would help ease a key relative rating weakness.
“By contrast, a materialisation of risks in the housing market and banking system, particularly if associated with a broader economic slowdown and/or funding pressures for the banks, would be negative for Australia’s creditworthiness. A sustained deterioration in the country’s public finances or sustained increase in inflation would be potentially viewed as negative rating triggers,” he concluded.
Australian Property Journal
