Via Moody’s:
Possible house price drop poses some risk for Canadian, Swedish, Australian banks House prices and household debt have risen to unprecedented levels in Canada, Sweden and Australia. This increases the risk that adverse economic developments could trigger a house price drop, leading to higher loan losses for banks. We have recently taken rating actions on banks in these systems to reflect this risk1,2,3 , although they remain among our most highly rated banks globally4 . While our base case is that house price growth will slow in Canada and Australia, the market may already be turning in Sweden. We believe that a more substantial correction would lead only to limited losses on mortgages, as the banks benefit from a range of safeguards. However, the banks would be exposed to second order effects, as falling house prices would likely weigh on consumer sentiment, amplifying the economic slowdown and pushing up losses on corporate and consumer loans.
House price rise increases sensitivity to downturn. Between 2000 and 2016, house prices rose by 144% in Sweden, by 115% in Canada, and by 113% in Australia. Household indebtedness has risen sharply over the same period. Mortgages account for 63% of the banking system’s total loans in Australia, 48% in Sweden and 39% in Canada.
