The OECD, a well-respected economic organisation, has cast a very downbeat light upon the Australian real estate market. The organisation believes there are serious issues emerging in the Australian property market which, if left unchecked, could result in a significant economic downturn. This is the first major review of the Australian property market by the OECD since 2014 and it does not make for good reading.
Talking down the Australian real estate market
The OECD is not the first major economic organisation to talk down the Australian real estate market which has seen property prices increase by 250% in real terms since the mid-1990s. This is a phenomenal performance in any economic climate never mind the climate we have all experienced since 2008. Indeed, such has been the buoyancy of the Australian property market that the average house price in Sydney is now a whopping AU$1 million!
Interestingly, when you bear in mind the number of complaints regarding overseas investors, the OECD believes that domestic buyers across Australia have pushed prices to these levels. In some cases, political parties have made headlines by suggesting it was overseas investors as opposed to domestic investors showing signs of “overexuberance” – although official reports prove otherwise. Against this background, it is not unreasonable for the OECD to suggest that the Australian property market may need to take a breather?
Broader economic risks
While many people automatically assume that property markets around the world stand-alone, they do have a significant impact upon the wider economy. The OECD believes that a sell-off in Australia property, and there are signs of a slowdown, would put pressure on household consumption and increase mortgage defaults. There are also concerns that a relatively modest slowdown in property prices could very soon turn into a “rout” as investors look to bank profits. As a consequence, there are calls for the Australian regulators to introduce limits on the number of investment loans made available. In theory, this would reduce the number of risky loans but it would obviously take some of the heat out of the Australian property market.
It is worth noting that the Australian economy was one of the few worldwide not to dip into recession in light of the 2008 US mortgage crisis. So, should we expect the Australian Prudential Regulation Authority to act?
If you take a step back and look at the Australian real estate market from a distance it has performed more than admirably since 2008. There have been regular calls to limit the number of loans to investors which would then reduce the risk profile of many banks in the region. It is also worth noting that household debt now stands at record levels with the debt to disposable income ratio a whopping 186.9%.
At this moment in time it does look as though further unchecked upward movement in Australian real estate prices could be storing up an even greater downturn/correction in the future. A number of parties have come forward in recent times to suggest the Australian market is overheating, many with their own agendas, but the OECD is an independent body with no axe to grind.