S&P warning of Australian housing market collapse lacks credibility: Michael Pascoe

Predictions by credit rating agency Standard & Poor’s that Australian house prices could fall 20% this year if Chinese growth stalls to 5% have been rubbished by Fairfax financial commentator Michael Pascoe.

S&P says there is a one in 10 chance of the Chinese economy suffering a hard landing (growth of 5% or less), which would result in unemployment doubling to 11.3% in Australia and trigger a sharp decline in Australian house prices of 20% or more.

Pascoe says S&P's form with “crystal ball gazing” has been “less than sparkling”.

“The firm has major credibility problems for its role in helping facilitate the global financial crisis by giving absolute top-notch AAA credit ratings to toxic junk.

“It does not differ from its peers in having capital-F fails on its scorecard for any number of credit rating disasters. It is easy to form the opinion it might now be trying a little hard to make up for lost trillions by sounding dire about anything and everything,” says Pascoe.

Even if China’s economy falls 5%, Pascoe says the flow-on effect of an Australian recession is by no means a sure thing, given “all the fiscal and monetary ammunition we have in store”.

“And the evidence is that we still wouldn't suffer a 20% plunge in house prices. In our last real recession, house prices didn't fall despite high unemployment and the tear-inducing interest rates that precipitated it,” he says.

Lastly, Pascoe argues that Chinese growth settling in at 8% “is both desirable and inevitable”. 

“It is what has to happen when you are the world's second-largest economy. If you really want to scare the horses, you could highlight the joint report by the World Bank and China's Development Research Centre that very credibly forecasts China's GDP growth slowing to 7% in the second half of this decade and 5% in the second half of the next. 

“That would be a good outcome that represents a massive increase in wealth and consumption, not to mention ongoing demand for natural resources, albeit with a lower steel intensity. Someone should tell S&P,” he says. 

In its China Australia Housing report S&P says there is a 25% chance of a “medium landing” for the Chinese economy – growth of 7%.

In this scenario, Australian GDP would be just 1.5%, inflation 1.3%, unemployment would rise to 7.2%, house price could fall by more than 10% and interest rates would drop between 2% and 2.5%. 

In S&P’s most likely scenario – a “soft landing” of 8% growth – housing is forecast to decline by more than 5% (in line with other forecasts), Australian GDP would be 3.3%, inflation 2.6%, unemployment would be at  5.2%  and interest rates would be between 3.5% and 4.1%. 

Last year the Chinese economy grew by 9.2%.