The Australian government’s reliance on housing to rebalance the economy comes with a number of inherent risks, according to analysts from Citi Research.
In a new deep dive research note on assets in Australia and New Zealand, analysts Paul Brennan, Josh Williamson and Vivian Jiang said we are currently in Australia’s largest housing construction upswing.
Despite measuring only 5% of gross domestic product (GPD), housing activity made up just over half of all private sector growth in the past three years with employment in the construction sector accounting for almost 25% of the total increase in labour during that time.
Conditions within this environment have created a number of risks, analysts wrote, including:
- Signs of over-supply in some east coast apartment markets
- Stretched housing valuations in Sydney and Melbourne
- An increasing share of interest-only loans
- A recent upswing in the share of investment mortgages
- A lack of repayment buffers for one third of mortgage holders
- Lower levels of policy flexibility than in the mining boom transition
With new measures by the Australian Prudential Regulation Authority (APRA) to tighten mortgage lending and stretched house valuations in the two major capitals, Citi’s analysts predict an incoming price correction.
“If APRA succeeds in limiting further rises in household debt and ultimately we see some mild deleveraging, there could be a partial correction in house prices during the course of the next two years.”
The largest corrections would be in the inner city apartment markets of Brisbane and Melbourne given their greater potential for oversupply, the analysts said.
“Either way, we aren’t expecting large enough price falls to trigger a downturn in the economy, but the downside risks have risen as house prices and household debt have continued to increase briskly.”
Further factors which could inflate these risk levels include slowing Chinese investment in property due to fewer foreign investment applications, lower immigration levels, and further out-of-cycle mortgage rate rises.
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