Fitch Ratings says a sharp housing market correction remains a possibility but slowing house price growth has dampened the risks of that occurring

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The Reserve Bank’s latest easing of loan-to-valuation ratio (LVR) mortgage lending restrictions is unlikely to affect the outlook for the housing market, according to Fitch Ratings.

“We do not expect the changes to have a meaningful impact on the credit profiles of Fitch-rated banks,” the credit ratings agency said.

“Mortgage restrictions are being rolled back for the second consecutive year, but we will still view them as relatively tight and do not expect a significant easing of lending standards in the medium term.”

“The share of high LVR mortgages in banks’ total new residential mortgage commitments has increased slightly this year, and could edge up further in 2019 following the latest easing.”

“However lending at high LVRs is likely to remain far lower than before restrictions were first introduced in October 2013,” Fitch said.

The agency said macro-prudential tools such as LVR restrictions had helped banks build up mortgage equity buffers over the last five years, which had strengthened their resilience to downturns in house prices.

It pointed to Reserve Bank figures showing mortgages with LVRs above 80% accounted for less than 7% of the banks’ total mortgage portfolio in September 2018, down from 21% in September 2013.

“Nevertheless, banks’ balance sheets could still be hurt by a housing market downturn,” Fitch warned.

“Around 55% of their loan portfolio is in mortgages, and households’ high indebtedness makes them vulnerable to an increase in mortgage rates or a labour market shock.

“A housing market correction would not only have a direct impact on mortgage asset quality, but would also reduce household consumption, affecting the broader economy, including the performance of banks’ business loans,”

Fitch said although a sharp housing market correction remained a possibility it was not the agency’s “base case” and slowing house price growth had dampened the risks of that occurring.

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