Is a Housing Decline Australia’s Single Largest Domestic Risk?

Housing market

Australia’s booming housing market is the continued topic of discussion. Young people can’t afford to live close to the city because they eat out far too much and travel all the time. The older generation is sitting comfortably on their property (or properties) just watching their net-worth climb.

That’s oversimplifying the situation of course. But inflated property prices are a problem for those looking to buy their first home.

According to the Organisation for Economic Cooperation and Development (OECD), Australia’s biggest domestic risk is a crash in the inflated property market.

A property crash bad news for all Australian’s

A property price crash would be disastrous indeed. Not just for homeowners, but for banks that individually own billions worth of mortgage loans. But you have to question how likely a property crash would be.

Australia’s population is growing, which increases demand. Borrowing cash is still relatively cheap. And property growth year-on-year is higher than the average mortgage rate of 4–5%, which encourages investors to buy more properties.

The OECD expects the RBA start increasing its policy rate towards the end of 2017.

The OECD continues:

Higher interest rates will relieve some of the pressure on the booming housing market, although the risks posed by possible overheating still call for enhanced macro-prudential policies.

But have the OECD got this right?

For one, monetary policy should be used to find the right balance between inflation and unemployment. If an economy is in recession and unemployment is high, central bankers will cut interest rates to promote growth and improve the jobs market. But if inflation gets out of hand, interest rates will be raised to a level where unemployment is not drastically affected.

This is how it’s supposed to work in theory anyway. I doubt the Federal Reserve, the RBA and other central bankers stick to this tenet. Interest rates should be changed to affect other factors, like property prices, currency or anything else.

Secondly, the property market is coming towards the top. I know I’ll regret saying that if the market steams ahead in 2017. But for now, growth is slowing down. According to CoreLogic, Sydney and Melbourne both posted month-on-month negative growth in May. And it could likely be negative for June as well.

So what’s the point of raising interest rates now if prices are no longer growing rapidly?

While a property crash could be one of our biggest domestic risks, it’s not highly likely judging from the current environment.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

PS: There aren’t many who think property will continue to drastically rise from here. But controversial economist Phil Anderson does.

Phil has previously predicted the US housing market crash, the Aussie property boom from 2009, and timed the US stock market all-time high in 2013 despite poor economic news.

In Phil’s exclusive new report, ‘Why Australian Property Is on the Verge of a Decade Long Boom’, he’ll show you why he’s so bullish on Aussie property.

To get your free copy of Phil’s report, click here.

Härje Ronngard

Härje Ronngard

Härje Ronngard

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