On the surface, the International Monetary Fund’s (IMF) warning about a potential “overshoot” in Australian property prices and a suggestion that regulators need to scrutinise property investment finances, is starting to sound like the US mortgage crisis situation of 2008. However, the situation is very different and the IMF actually offers high praise for the Reserve Bank of Australia with regards to its ongoing management of property investment and the property market.
Even though the IMF did not point towards the likes of Sydney, Melbourne and Brisbane, which have seen significant property price rises this year, the general consensus of opinion is that the IMF warning is aimed at these hotspots. Despite the fact that many experts have tried to talk down the Australian property market in years gone by it continues to maintain forward momentum and is attracting more than its fair share of both domestic and overseas investors.
Why the warning?
The warning from the IMF is basically a shot across the bow of the Australian property market to give investors a wake-up call about chasing property prices to unsustainable levels. This is a situation which is starting to emerge in places such as the UK, especially the London market, and regulators around the world are obviously concerned about any future banking crisis.
Quote from PropertyForum.com : “Australian superannuation funds to reduce property exposure“
There is no doubt that the 2008 US mortgage crisis has focused the minds of regulators and financial operators with regards to future property market risks. The US market epitomised the chasing of property prices to unsustainable levels, excessive competition in the mortgage market and companies willing to operate on minute profit margins in order to protect their market share. The situation is very different today although whether we will see a return to the boom and bust of 2008 in years to come remains to be seen.
What could spoil the Australian property market?
While the Australian economy continues to perform admirably, especially compared to the worldwide market, we will at some stage see an increase in Australian interest rates, we could see a reduction in household income and credit levels could rise. It seems highly unlikely in the short to medium-term the Australian economy will go into reverse and perhaps more likely that a financial shock could emerge from overseas, over which the Australian government would have no influence.
If this was to happen the IMF believes that the Australian authorities would need to take preventative action as soon as possible to avoid further problems. As we touched on above, despite the doom and gloom of this report, on the surface at least, there is significant praise for the Australian authorities in the way they have handled the situation to date. Sometimes it is easy to forget the worldwide economy is still struggling, America is facing a major budget crisis and Europe is still in a mess. Against this background, ongoing economic growth in Australia not to mention rising property prices reflects the way in which the current government and previous governments invested for the future.
While nobody is suggesting that the Australian property market is on the verge of a collapse, the report from the IMF, while broadly appreciative of the performance of the Austrian authorities, is a warning shot for investors. Property prices are starting to move into uncomfortable areas in some parts of the country with the majority of the price rises focused upon Australia’s major cities. It would not take too much of an economic crisis, whether within Australia or overseas, to shake the confidence of investors and perhaps lead to a slowdown in economic growth.