House prices teeter on European knife-edge

by Adam Smith14 Dec 2011

Europe is the key to Australian house prices in 2012, a property analyst has claimed.

SQM Research managing director Louis Christopher has predicted house prices will return to growth in 2012. While he conceded this was a "relatively bullish scenario", Christopher said it was a scenario that depended largely on what happens in Europe.

"Yes, Europe is the key. The risk is clear and present," Christopher said.

Large scale banking defaults in the Eurozone would likely cause a major credit squeeze in Australia, in turn causing the banks to "ration housing credit" and reduce LVRs, Christopher claimed.

"Of course, if the squeeze is large enough, banks could come up with additional ways to reduce their balance sheets. At its worst this literally could include calling loans simply because the loan-to-value ratios have risen too high due to drops in property prices," he said.

This scenario would be a "last resort" for Australian banks as it would trigger even steeper declines in house prices, Christopher said.

Christopher still contended that Australian home values were set to increase in 2012 in a lower interest rate environment, but gave the caveat that this was contingent upon Europe "muddling through" without a default.

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