From Moody’s today:
In the second half of the last decade, housing market corrections weakened the sovereign credit profiles of several high income countries, while leaving others largely intact. Australia, Canada, New Zealand and Sweden (all Aaa stable) avoided housing crises during that period, but because of a rapid increase in house prices and household leverage, they are now among the high-income sovereigns most exposed to a housing downturn. Should such a downturn occur, GDP growth would slow. Nonetheless, unless it is accompanied by other long-lasting negative shocks, a housing downturn is unlikely to fundamentally undermine these sovereigns’ credit profiles because strong banking systems limit contingent liability risks to government balance sheets. Other mitigating factors variably include households’ ample liquid assets and moderate economic reliance on construction. » New Zealand and Sweden are most exposed to deterioration in housing affordability. House prices have risen more rapidly than wage growth, and variablerate mortgages are common. If there were to be a fall in incomes and/or a rapid rise in interest rates, that would weaken demand for housing, and exacerbate economic and financial shocks.
» Lower liquid household assets relative to debt expose Australia to a sharper growth slowdown. Liquid financial assets would provide some financial cushion to economic shocks and reduce the risk of a sharp retrenchment in consumption in Canada and New Zealand. Sweden’s social safety net affords a similar buffer at the household level but results in greater immediate fiscal exposure to shocks.
