Rising Property Prices Put Australia Economy at Risk

The Organization for Economic Cooperation and Development has warned of the threats that further increases in the Australian housing market could have to the national economy.

The latest OECD Economic Survey of Australia notes that while the Reserve Bank of Australia’s current supportive stance of monetary policy is appropriate, a continued increase in property demand by both owner-occupiers and investors could have a “significant downward correction” that spreads to the rest of the economy, BrokerNews quoted OECD as saying.

 “Unless downside risks materialize, the current supportive stance of monetary policy remains appropriate at present, particularly in the absence of inflationary pressures,” the report said.

“However, a side effect is a risk that accommodative policy may be increasingly distorting financial markets and, especially, house prices (which have risen to very high levels).”

Although rates will have to be normalized eventually, the timing and pace of the change will ultimately depend on growth, employment, inflation and the housing market, the OECD said.

The report warned that house prices have increased by 250% since the mid-1990’s while the ratio of house prices to incomes has risen further, straining affordability. However, the OECD found that foreign demand for housing has not substantially impacted the growth of property prices.

Furthermore, there are signs that the Australian property market is cooling, the report stated.

“Recent data indicates price growth has eased in most urban centers, reflecting in part a substantial supply response–dwelling approvals and investments have increased substantially in recent years. However, the significant increase in Australia’s house prices and price to income ratios remains.

Overall, macro-prudential measures implemented by the Australian Prudential Regulation Authority were helping to contain housing loan growth, the report added.

“As recommended in the previous survey, the authorities have deployed ‘macro-prudential’ measures to cool mortgage lending and reduce risks. Measures include pressure on banks to limit growth of mortgage lending to those purchasing for investment purposes.”

These supplement the measures each institution takes to regulate mortgage lending on an individual corporate basis–an approach which is effective since Australia’s big four banks account for around 80% of market share.

Most Australian banks are facing a one or two notch rating downgrade over the next two years as rising residential property prices put financial institutions at risk.

In a commentary on Australian banks entitled ‘Rising Economic Risks Could Cut Ratings on Most Australian Financial Institutions by One Notch’, S&P Global Ratings has examined the dangers of Australia’s hot housing market.

Rising economic imbalances are increasing the risk of a sharp correction in property prices, analysts at the global ratings agency said.

If such a scenario occurs, S&P highlighted eight financial institutions (including six banks) which would incur large credit losses and a subsequent credit rating downgrade.