Standard and Poor's has warned of a significant risk of a sharp correction in New Zealand property prices that could force it to lower the credit ratings of the big four Australian-owned banks.S&P also warned that New Zealand's banks remained vulnerable to a disruption of funding lines on international markets, given that 37 per cent of local customer loans are still funded through these markets.The ratings agency said its base case was for a stabilisation of house prices at current levels, which would also stabilise bank asset quality ratios. Home mortgages make up 60 per cent of total banking sector loans."But a significant risk remains that a sharp correction in property prices could occur," S&P said.One scenario it painted was of a weakening of New Zealand's terms of trade or a widening of its current account deficit that led to a slump in the New Zealand dollar and property prices."Such a scenario, in conjunction with a rise in unemployment, could increase the risk of a significant rise in banks' credit losses, on the back of a build-up in housing prices and domestic credit over the period that preceded the global financial crisis," Standard and Poor's said. This would have a material impact on the strength of the balance sheets of New Zealand banks.It also noted a surge in house prices in Auckland and Christchurch in the second half of 2012 could amplify the credit losses if there was a sharp correction. Standard and Poor's said it would have to lower the credit ratings of the big four Australian-owned banks and other banks if it lowered its economic risk measure for New Zealand.It also warned that the drop in overseas funding of lending from 41 per cent in 2008 to 37 per cent in 2012 was not enough to describe it as a structural improvement."We consider the New Zealand banking system's sensitivity to a disruption in external funding could be more pronounced during a period of rapidly depreciating currency, falling property prices, or increased credit losses," it said.Meanwhile, Reserve Bank figures published on Thursday confirmed the surge in mortgage lending over the last six months that has boosted property price inflation, particularly in Auckland and Christchurch.Annualised mortgage lending growth has surged from 1.6 per cent in May to four per cent in January.