The housing sector has supported the Australian economy for several years, but further increases to house prices without increases in wage growth will increase the possibility of systemic risks, says Pimco.
Housing has been the “main domestic growth engine” in Australia since the economy shifted away from mining in 2012, said Pimco co-head of Asia portfolio management Robert Mead, which improved headline economic growth but increased household debt at lower interest rates.
Mr Mead noted that average lending rates for standard housing loans as measured by the Reserve Bank of Australia (RBA) fell from 7.3 per cent in 2012 to 5.25 currently, while the RBA policy rate fell from 4.25 per cent to 1.5 per cent in the same period of time.
“This demonstrates a highly effective transmission mechanism of monetary policy: more than 76 per cent of RBA policy rate reductions have flowed directly through to the main consumer borrowing rate,” Mr Mead said.
“However, during this same period wage growth fell from over 3.5 per cent per annum to less than 2 per cent, and the unemployment rate increased from 5.1 per cent to 5.9 per cent. This suggests that the capacity of the average Australian borrower to take on additional debt was actually weakening, not improving.”
While the RBA’s monetary policy regime was “highly effective” as the economy weakened, Mr Mead cautioned the bank’s implementation of policy is likely to be made more difficult by the “significant” increase in household debt at a lower borrowing rate.
“Looking forward, we believe the current economic backdrop accompanied by some recent increases in mortgage rates by the Australian banks will keep the RBA on the sidelines for all of 2017,” he said.
“We also expect increasing reliance on macro–prudential policies to limit the upside in property prices. While housing has definitely helped support the economy over the past four to five years, any further increases in house prices that are in excess of wage growth will represent potential systemic risks for the economy.”
Mr Mead said diversification was critical to investors, and should be a key theme for portfolios.
“Australian bank hybrids, equities, term deposits and residential investment properties are all essentially one big bet on Australian housing,” he said.