S&P warns against growing debt risk

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Ratings agency S&P Global does not see a sharp correction in Aussie house prices anytime soon, but it does predict a risk from growing household debt that could leave many households vulnerable to economic deterioration or interest rate increase.

"We don't anticipate a sharp correction in house prices in the near term," said S&P analysts Craig Parker and Graeme Ferguson in a report on real estate investment trusts in the Asia-Pacific region. "However, a scenario of the early 1990s where unemployment reached 11 per cent would place households under severe financial stress."

According to the report, the total consumer debt has increased significantly, fuelled partially by the increase in house prices. Loss of income is also the main cause of Australian borrowers defaulting on their mortgage.

"The rising household debt has lowered the headroom if the economy were to deteriorate or when interest rates rise," the report said.

S&P also noted that any severe downturn in the housing market would have a huge impact on the country's big banks since about 60 per cent of the Big Four's loans are for residential properties.

S&P is not the only finance industry player that weighed in on the speculation that Australia is heading for a housing price correction. Earlier, the Organisation for Economic Co-operation and Development also warned that a sharp rise in apartment construction could lead to a "dramatic and destabilizing" end to the housing boom. Similarly, the Reserve Bank raised concerns of an apartment glut and forecaster BIS Shrapnel called it "an accident waiting to happen."

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