A hard landing in China is likely to put a severe dent in Australian house prices, but even a soft landing could see prices falter.
A new S&P report has claimed a soft landing in which China experiences 8% GDP growth could see Australia's house prices eroded by more than 5% in 2012. A doomsday scenario in which China saw 5% GDP growth could see Australia sent into a recession, with house prices falling 20%.
S&P analysts Craig Parker and Vera Chaplin predicted a soft landing was the most likely scenario for China, saying the effect on Australia was likely to be "muted".
"Based on this scenario, we expect the Australian economy to continue its moderate
growth path and that the performance of the Australian housing market will soften further but not experience a sharp decline given the sound economic outlook. In this scenario, we expect the impact on both mortgage defaults and loss-given default to be muted and remain at relatively low levels as we expect the unemployment rate to increase marginally and property price decline to continue its current softness," they wrote.
The second-most likely scenario, Chaplin and Parker said, was a "medium" landing in which Chinese GDP growth fell to 7%, shaving 10% of Australian house prices and sending unemployment to 7.2%. The analysts gave this scenario a 25% likelihood of occurring. The hard landing scenario would see unemployment swell to 11.3%, but S&P said there was only a 10% probability this scenario would come to pass.