Australia is among a handful of countries in the world to have the triple-A (AAA) status from three leading credit rating agencies.
Thanks to the implicit government support for banks during financial crises, the big four banks piggyback off the nation’s credit rating and the same top status.
Having a AAA rating indicates a good standing, and provides easy and cheap access to borrow since the holder is considered as low risk.
Australia’s housing market has always been a factor determining its highest rating held since 2003, as it is part of the financial stability and outlook criteria which, among others, include household debt and banks’ exposure risks.
When back in June the world’s biggest credit rating agency, S&P Global Ratings, reinstated Australia’s AAA rating outlook to “stable” and took it off a potential downgrade watchlist, it flagged “concerns over its high level of external and household debt”.
The outlook had been downgraded to negative in April 2020 due to the “fiscal and economic risks that the country is facing due to the coronavirus pandemic”.
Similarly, Fitch Ratings expressed concerns about Australia’s bubbly housing market.
“Household debt, at 180% of disposable income at September 2020, is among the highest of ‘AAA’ rated sovereigns and remains an economic and financial stability risk in the event of a sustained labour market or interest rate shock,” Fitch Ratings said in February when reaffirming Australia’s rating at AAA with stable outlook.
After the RBA and banks called the government to adjust policy settings to bring surging house prices under control, IMF – the International Monetary Fund, urged Australia to address the rising financial stability risks posed by the runaway housing prices.
The IMF said in its report regulators should consider tightening lending controls on overstretched homebuyers to cool the red-hot housing market and reduce risks to the financial system with a “comprehensive policy response”.
“Macroprudential policy should be tightened and lending standards closely monitored.”
The Council of Financial Regulators, chaired by the RBA, held a meeting last Friday to look at options of cooling the overheated home prices and will publish its quarterly statement this week.
The main reason why everybody is concerned about the housing market is that the current price surge is (a bubble) not based on any fundamental factors and is happening against the backdrop of the stagnant wage growth, mass job losses, uncertain economic outlook, imminent recession, widespread lockdowns, collapsing prices of construction materials and iron ore in the international markets.
Treasurer Josh Frydenberg who appears to be clueless for now what to do told Sky News on weekend he was aware the current prices are being watched very closely”.
“I’ve been talking to the heads of APRA – the Australian Prudential Regulator – as well as the head of RBA, Phil Lowe, and I know they’re watching it very closely”.
The overall expectation among the regulators and the government is that wage growth is likely to remain low in the foreseeable future, and economic growth might be further affected due to the oversupplied commodities market and increasingly gloomy geopolitical situation, especially deteriorating ties with China.
This puts the Australian government in a weird dilemma: rush to curb the runaway housing prices now and prepare the market for a soft landing, or risk losing the credit rating with long-term implications due to the mounting financial stability concerns. The latter would further complicate economic recovery, rise borrowing costs and lead to a hard-landing (crash) in the housing market.