In its recent study, intergovernmental economic organization, The Organisation for Economic Co-operation and Development (OECD), has released a severely negative outlook for the Australian housing market. It has anticipated Australian property bubble collapse in the near term.
This negative forecast for the sector is in sharp contrast to its past performance as evaluated recently by Russel Long-Term Investing report. The report findings suggest the average return of 8% and 10.2% in residential investment property over the past 10 and 20 years respectively.
OECD has warned Australian policymakers of a crisis like the situation is the housing market and urged the authorities to prepare for contingency plans and bail-in conditions for the future market downturn spreading across financial institutions as well.
As per OECD official data, Sydney and Melbourne house prices soared by 75 % during 2012-2017 and began to tumble after that. It anticipated 15% massive drop in prices by 2019 end.
As per CoreLogic home values index for the year to November 30, house values have increased in Brisbane (0.6%), Adelaide (1.4%), Hobart (8.9%) and Darwin (5.1%). However, what is troublesome is cooling housing market in major cities. Sydney property values have fallen by a massive 9.2%, followed by Melbourne and Perth experiencing a decline of 7.6% and 3.8% respectively. The study also suggests the fall of Sydney home prices by 0.5% in the first week of this month, with the total decline of 10% since July last year.
Leading investment banks Morgan Stanley and ANZ have also predicted housing market collapse in Sydney and Melbourne by 15 to 20 % by 2019 end.
Undoubtedly, the Australian economy stayed strong at the peak of the global financial crisis of 2008 surviving on strong commodity demand from its major trading partner China. The banking sector performed well with the robust balance sheet and lesser debt exposure. Also, a healthy fiscal initiative such as government stimulus of guarantying bank deposits for the next three years during 2008, greatly insulated the economy
However, Australia’s massive, record-breaking performance of continued high growth for 27 years is likely to face a declining trend. With lower interest rates and soaring housing demand, Australian property has enjoyed significant success for an extended period. This means any possible downward correction in interest rate will result in a steep fall in real estate prices and thus a big blow to economic growth.
The much-anticipated slowdown in the Chinese economy and its import demand, owing to global trade & water issue is likely to have a deteriorating impact on Australia’s current account balance and national income. This will lead to lesser wealth in the hands of the household sector, which already suffering from record-low savings rate and massive household debt (189% of disposable income), will be likely to turn debt defaulters. This will create a scenario of severe bursting of the property bubble.
Economic history suggests a prolonged period of high growth, soaring asset price & bubbles and massive accumulated debt has severe financial and economic consequence.