Moody’s says property market may be overheating and "could face a correction"

Moody’s says property market may be overheating and
Moody’s says property market may be overheating and "could face a correction"

A new report from Moody’s Investors Service notes that Australia’s steady consumer sentiment is “remarkable” given the headwinds being faced, pointing to property wealth from rising housing prices as one of the factors maintaining confidence.

However, it is this factor that also has them concerned, with Moody’s suggesting that this trend indicates medium-term risks that the real estate market “may be overheating, with both price-to-income and price-to-rent ratios reaching levels well above historical averages”.

In fact, they noted that the growth rate – at its highest in nearly four years – along with supply constraints, an influx of foreign capital and monetary policy remaining accommodative for the “foreseeable future” suggests a drop in prices may be seen.

They noted that these factors suggest “the housing market appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction”.

“Re-accelerating housing credit suggests that monetary factors, especially record-low interest rates, are playing a prominent role in fueling the housing market trends. In terms of volumes, however, rising housing prices have not so far resulted in a construction boom: residential construction activity remains largely in line with demand trends.”

The impact of a real estate market contraction on the rest of the economy is limited by this, along with historically low leverage levels, strong mortgage buffers and a well-cpaitalised banking system.

Banks are notably sensitive to employment conditions, “amplified by the high proportion of household loans in their portfolios and a persistently high level of household leverage”.

However, they are mitigated by low loan-to-value rations, high lending standards and a moderate pace of housing credit growth, they noted.

Jennifer Duke

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

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