The long-term ratings of Australia's four major banks, ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB) and Westpac, were downgraded to Aa3 from Aa2, and their baseline credit assessments (BCAs) were downgraded to a2 from a1.
Moody' says it dropped its view, as Australia's credit conditions have deteriorated.
Moody's cited high levels of debt and rapid credit expansion in the context of nominal wage growth had forced its hand, increasing the sensitivity of household expenditure and therefore the banking sector's exposure to a potential shock.
The ratings outlook for all four lenders is stable, Moody's said.
Banking expert David Tripe, of Massey University, said it could make a difference to interest rates of about 10 basis points.
The Australian government has taken steps in recent months to cool the red-hot property market amid concerns that speculation in housing could ultimately hurt consumers, banks and the economy.More news: US and Moscow in delicate talks on Syria tensions
The banks are also bracing themselves for an announcement from the bank regulator, APRA, on whether it will require the banks to hold more capital as a fail-safe against their enormous mortgage lending.
At the same time, banks face higher funding costs as they compete more closely to attract retail deposits. It said it was confident that the big four would be considered too big to fail, and the Government would step in.
Last month S&P Global Ratings also downgraded the credit ratings of nearly all of Australia's financial institutions on similar concerns about the risks of a property market downturn. Bank shares opened flat on Tuesday in line with the broader market.
In Hong Kong, the ratio stands at only 14 percent.
In May, Moody's competitor, Standard and Poor's, downgraded nearly all the financial institutions in Australia because they face an "increased risk of a sharp correction in property prices".
The report said the legislation should also be amended to allow the Treasurer to suspend the levy in cases where banks are in extreme financial hardship.