Surging Auckland house prices lead to raft of S&P credit rating and stand alone credit profile downgrades

Standard & Poor’s has cut its stand-alone credit profiles on New Zealand’s big four banks, and lowered its ratings on some other local financial institutions, due to concern over rising Auckland house prices.

S&P has lowered its ratings on seven New Zealand financial institutions. And although it has affirmed the ratings on 11, although it lowered the stand-alone credit profiles of six of these including the big four banks.

S&P says none of its ratings actions are due to higher existing or emerging risks specific to the institutions themselves.

“The rating actions reflect our view that New Zealand financial institutions face heightened risks because of an increase in the country’s overall level of economic imbalances over the past three years. In particular, we believe that the rapid rise in house prices in Auckland during this period has amplified the risk of a sharp correction in property prices, although we consider that such a scenario remains unlikely in our base case,” S&P says.

The Real Estate Institute of New Zealand yesterday reported Auckland’s median house price rose 21% in the year to July to $735,000.

“We believe that if a sharp fall in house prices in Auckland were to occur, most financial institutions in New Zealand will be adversely affected even when they do not have significant direct exposure to home lending in the city. This is because of the importance of Auckland to the New Zealand economy; it accounts for about 35% of the GDP and more than one-third of the country’s population,” says S&P.

“Additionally, we believe that a sharp decline in house prices in Auckland would likely be accompanied by weakening in other macroeconomic factors such as a slowdown in GDP and a rise in unemployment. The business and consumer sentiment is also likely to suffer as a result, in our opinion. Accentuating these risks are New Zealand economy’s external weaknesses in our view. We expect that the credit losses of most New Zealand financial institutions will significantly increase in such a scenario.

See credit ratings explained here.