Economist warns of sub prime property crisis in Australia

by Ray Clancy on March 28, 2011

Australia headed for sub prime mortgage crisis

Rising property prices could result in a mortgage crisis in Australia that could be as harmful as that in the US that sparked the global economic crisis, a conference in Sydney has been told.

The possibility of a sub prime mortgage crisis results from prices being 20% higher than they should be and people just can’t afford the costs, according to economist Brian Haratsis of Macro Plan Australia, one of the country’s foremost strategic advisors.

Speaking at the first ever Australian Mortgage conference he warned that without government intervention on house prices those at the bottom end of the market would be worst affected.

‘What would happen if we found ourselves in another financial fallout and housing prices were to significantly drop?  Australia’s property market is inflated by around 20% at present and this poses genuine risks to our stability,’ Haratsis said.

‘We need to be asking what we can do to reduce the cost of housing over the next decade through regulatory and taxation means to avoid such a threat to the mortgage industry and economy as a whole,’ he added.

He is also predicting at least two rate rises this year, pushing home loan interest rates as high as 8% for some that could freeze the market. ‘Australia is going to be extremely exposed between 2012 and 2015 because people won’t be able to afford to buy a house. A lot of people could wind up with negative equity and we could have a sub-prime issue on our hands,’ he told the conference.

His warning comes as a BankWest study shows 78% of the nation’s local government areas have average house prices well outside the affordability of many professions including police, teachers, nurses, fire fighters and ambulance officers.

The bank deems an area unaffordable if the average house price is more than five times the average annual earnings of a worker. The percentage of capital city council areas seen as unaffordable is up from 75% in 2009, and 70% in 2005.

‘These are the essential workers which Australians rely on every day to provide important services and they face the possibility of being priced out of housing in the communities in which they serve,’ said BankWest Business chief executive Ian Corfield.

‘This means that many are being forced to rent for longer or buy and face a long commute into work. This is particularly evident with the strengthening in the east coast property market in the last 12 months which has stretched affordability for key workers in Sydney and Melbourne,’ he added.

The research also shows how difficult it is for all first time buyers in capital cities. Sydney is the most unaffordable city, with the average house price more than eight times the average annual earnings of key workers. Peppermint Grove in Perth was the most unaffordable council area, followed by Sydney’s Mosman and Woollahra council areas.

Regional areas are much more affordable for the 480,000 Australians working in key community roles, with 65% of council areas deemed affordable, the BankWest report also says.

Tasmania’s Brighton, Sorell and Glenorchy City council areas were in the top five most affordable areas, along with Playford and Salisbury in South Australia.

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