Australia, Canada, New Zealand and Sweden are exposed to a potential housing market correction - Moody's

Moody's Investors Service says that Australia, Canada, New Zealand and Sweden -- all rated Aaa stable -- are exposed, through different channels and to varying degrees, to a potential housing market correction.

However, unless the reversals in house prices were accompanied by other long-lasting negative shocks, they would not fundamentally undermine the sovereigns' credit profiles.

Moody's notes that all four countries have strong banking systems with high capitalization levels, conservative business models and strong liquidity, which lower the sovereigns' banking system-related contingent liability risks. Such contingent liabilities were among the highest costs of housing crises elsewhere.

Moody's conclusions were contained in its just-released report, "Sovereigns -- Advanced Economies: Credit Profiles Resilient to Rising Household Debt and Stretched Housing Affordability."

The report focuses on the four countries that have experienced the largest increases, among advanced economies, in house prices and household debt over the last three years. House prices rose by more than 30% in real terms in New Zealand and Sweden and by approximately 20% in real terms in Canada and Australia. In all four cases, these increases have been accompanied by higher household leverage.

In the event of a reversal in house price gains or other economic or financial shocks, higher household debt levels raise the risk of consumer retrenchment and imply higher likelihood of stress in the banking system, all else being equal.