Moody’s Investors Service Monday downgraded the long-term ratings of six big Canadian financial institutions by one notch, citing the rising risks from the housing market and household indebtedness.

The rating agency says that high levels of consumer indebtedness and elevated housing prices “leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces.” It reports that the Canadian household debt to personal disposable income ratio reached a record 165% in September 2012, up from 137% as of June 2007. This growth in consumer debt has been driven by rising house prices, which have increased by approximately 20% since November 2007, it notes.

Moody’s central scenario for Canada’s GDP is for it to grow between 2% and 3% in 2013, but downside risks have increased, it warns. “The open, commodity-oriented economy is exposed to external macro-economic risks, which if they arise would have significant ramifications for the Canadian economy, and consequently its banks,” it says.

The downgrades affect Bank of Montreal, Bank of Nova Scotia, Caisse centrale Desjardins, CIBC, National Bank of Canada and TD Bank.

“Today’s downgrade of the Canadian banks reflects our ongoing concerns that Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past.” said David Beattie, a Moody’s vice president. “Following today’s actions, the Canadian banks still rank amongst the highest rated banks in our global rating universe.”

In addition to the rising downside risks, Moody’s says National Bank, BMO and Scotiabank have sizeable exposure to volatile capital markets businesses; which Moody’s believes “expose financial firms to the risk of outsized losses and risk management and controls challenges, and leave them highly dependent on the confidence of investors, customers and counterparties.”

Moreover, Moody’s says that the Canadian banks rely on confidence-sensitive wholesale funding, which is obscured by limited public disclosure, and increases their vulnerability to financial markets turmoil.

The move concludes a review that the rating agency initiated in October 2012, and all ratings for the banks now have a stable outlook, it says.