In its latest update on the Australian economy, released on Sunday (9 December), the head of the OCED Economic Department’s Australia desk, Philip Hemmings, wrote that the nation’s housing market is a source of vulnerability.
Mr Hemmings noted that prices have more than doubled in real terms since the early 2000s and household debt has surged.
“The market has started to cool over the last year, with prices falling most notably in Melbourne and Sydney. So far, data point to a soft landing without substantial consequence for the overall economy. Nevertheless, risk of a hard landing remains,” he said.
“Notwithstanding the estimates that Australia’s market is not greatly overvalued, house prices could fall more substantially. Should this happen, household consumption could weaken. Households would cut their spending due to lower housing wealth and due to increased economic uncertainty generated by downturn.
“Households would also reduce expenditures related to the purchase, sale and maintenance of housing (such as spending on renovation and interior decoration). Sustained decreases in house prices would also weaken construction activity. Weakened aggregate demand could in turn lead to losses on loans to businesses, putting stress on the financial sector.”
Treasurer Josh Frydenberg responded to the OECD warning by stating that Labor’s housing tax policies “will do just this”.
“They will damage Australia’s housing market and destroy the equity that people hold in their homes, increasing the risk of financial instability and lower economic growth,” he said.
“The OECD’s Economic Survey follows their Economic Outlook last month and builds on recent findings from global credit rating agencies, Standard & Poor’s and Fitch, which reaffirmed Australia’s AAA credit rating and the International Monetary Fund which recognised our budget management and strong economic growth.”
Mr Frydenberg’s comments come after Prime Minister Scott Morrison confirmed that the government would go to an election after delivering an early federal budget on 2 April 2019.
House prices continue to slide
Australian capital city dwelling prices fell another 0.9 of a percentage point in November marking 14 months of consecutive price declines since prices peaked in September last year. This has left prices down 5.3 per cent from a year ago, their weakest since the GFC.
The decline is continuing to be led by Sydney and Melbourne.
Sydney dwelling prices fell another 1.4 per cent and have now fallen 9.5 per cent from their July 2017 peak. Meanwhile, Melbourne prices fell another 1.0 of a percentage point and are down 5.8 per cent from their November 2017 high.
Perth also saw prices fall by 0.7 of a percentage point, but Hobart and Darwin saw prices rise by 0.7 of a percentage point. Prices in Canberra rose 0.6 of a percentage point and Brisbane and Adelaide prices rose 0.1 of a percentage point.
AMP Capital chief economist Shane Oliver noted that ongoing weakness in these two cities is evident in very weak auction clearance rates and auction sales volumes.
“Recent auction clearance rates averaging just below 40 per cent in Sydney and Melbourne are consistent with ongoing price declines of around 7 to 10 per cent per annum,” he said.
The economist believes the decline in Sydney and Melbourne property prices has much further to go as Comprehensive Credit Reporting kicks in, making it even harder to get multiple mortgages.
Many homebuyers will be watching out for changes to negative gearing and capital gains tax, which could become the new reality after a change of government at the coming federal election.
“In these cities we expect to see a top to bottom fall in prices of around 20 per cent spread out to 2020,” Mr Oliver said.
“However, the plunge in clearance rates and the uncertainty around credit tightening and tax concessions indicate that the risks are on the downside. So there is more to go yet.”
