Moody’s Investors Service has downgraded the insurance financial strength rating of Westpac Lenders’ Mortgage Insurance to A1 from Aa3, while revising the outlook to stable from negative.

It has also placed Genworth Financial Mortgage Insurance’s A3 insurance financial strength rating on review for downgrade.

The moves follow Moody’s decision to downgrade the long-term ratings of 12 Australian banks and their affiliates due to “elevated risks” in the household sector amid surging Sydney and Melbourne property prices.

“High and rising household debt in the context of low nominal wage growth has led to very high levels of household leverage,” Moody’s says.

The risks heighten the sensitivity of bank credit profiles to a shock, despite capital and liquidity improvements in recent years, according to the ratings agency.

Moody’s cut the long-term rating for Westpac to Aa3 from Aa2, in line with the same change for rivals ANZ, Commonwealth and NAB.

It says the Genworth Financial Mortgage Insurance review is also driven by the household risk scenario.

“As a mortgage insurer, there is potential for higher losses emanating from residential mortgage loans with higher loan-to-value ratios.”

The review will examine portfolio loss development and potential for deterioration, plus capital adequacy.

It will also examine sustainability of the business franchise, given lender tendencies to retain a greater level of risk on their own balance sheets and competition from foreign businesses.