Property market crash could fuel recession: OECD

Property market crash could fuel recession: OECD
Property market crash could fuel recession: OECD

A potential hard landing in the property market could morph into a recession fuelled by record high household debt and the control wielded by big banks, according to a grim forecast by the Organisation for Economic Co-operation and Development.

The Paris-based OECD said in its latest economic report that alongside a shakeout in China and ongoing weakness in business investment, the single biggest threat to Australia is from a potential hard landing in the property market after years of double-digit price gains, according to a report.

Putting the risk of a recession at around one in five, the report said several potentially destabilising events were possible. (Table 2). 

“Threats to stability from overheating in terms of output or inflation has lessened in recent years, however, macrofinancial indicators underline the threat from the housing market, with house prices and related indicators pointing to continued vulnerability,” says the report. 

It cautioned that “a fall in house prices and or demand could have significant macroeconomic implications. Specifically, the market may not ease gently but develop into a rout on prices and demand with significant macroeconomic implications”.

RBA Governor Philip Lowe recently said the combination of record high household debt to income when wages were growing slowly was a “sobering combination” and could lead to a slowdown in spending which would hurt the economy.

The 13th Annual Demographia International Housing Affordability Survey recently ranked Sydney as the second least affordable housing market behind Hong Kong. 

Sydney’s “median multiple”, or the median house price divided by the median household income is 12.2,  with Melbourne not far behind. 

The OECD report noted that households account for around half of Australia's total debt, which has soared well above 250 per cent of gross domestic product, compared with around a third of the total in 1995.

Continuing price gains in Sydney and Melbourne are feeding concern that ultra-low official interest rates, as well as tax breaks that favour older generations, are distorting the housing market, worsening inequality, affordability, and concentrating systemic risks in a handful of big lenders. 

Furthermore, yields are on a downward slide as investors fall over themselves to buy at prices that imply they are betting only on future capital gains rather than meaningful rental returns, the AFR article said citing OECD data.

Property market crash could fuel recession: OECD

Source: OECD

The OECD report also noted that “banking remains highly concentrated, potentially compromising competition and making Australia vulnerable to ‘too big to fail’ risks.

Low interest rates have also fuelled a surge in housing mortgages which has pushed Australia towards the top of the OECD rankings for household debt and to around one-third more than the group's average, it said. 

The OECD lists a potential shakeout in global trade caused by a misstep on US Federal Reserve rate hikes, rising protectionism, and the risk of a Chinese yuan devaluation, there is now a "non-negligible risk" of recession in Australia over the next two years.

The grim warning comes amid positive GDP numbers for the fourth quarter helped by the rise in global commodity prices. The RBA has pegged its economic growth forecast of 3 percent for the next two years.

Housing Affordability Recession

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