19 September 2012 7:05am

Australia's major banks have sufficient earnings capacity and capital to absorb direct housing loan-related credit losses, Moody's Investors Service reported yesterday.

Moody's said the combination of elevated house prices and unprecedented household indebtedness exposes the Australian housing market to adverse shocks and so warrants caution.

"While favourable economic trends may persist, we believe that the risk–return trade-off in the Australian housing market has tilted towards greater riskiness, exposing banks to the possibility of an adverse shock to asset quality," the...