Australia has been singled out to be at risk of an overvalued property market by a leading global investment bank.
According to global real estate research by Credit Suisse, rising house prices become problematic when accompanied by rising household debt – which is the case in Australia.
“Price increases are not yet necessarily a problem in themselves; the risk of overvaluation often arises only in combination with sharply rising debt,” the investment bank said.
“The growth in credit volumes is trending higher in many countries, as are price levels in relation to incomes and rent levels. In terms of affordability, Sweden, the UK and Australia stand out in particular. There, house prices are already well above their long-term average compared with incomes and rents.”
According to the latest Financial Aggregates from the Reserve Bank of Australia, housing credit grew by 0.5% in February after a 0.6% rise in January. Household debt geared towards housing is now up 7.2% on a year ago – the strongest annual growth in almost four and a half years.
The Reserve Bank meets today for its monthly monetary policy board meeting, in which the market is currently split on whether the cash rate will be dropped to 2% to maintain downward pressure on the Australian dollar or held to mitigate these risks in the housing sector.
However, Credit Suisse says monetary policy is unlikely to keep the property market in check in the present environment.
“Examples like Sweden have also shown that monetary policy alone is often not enough to curb an overheating real estate market. To exert a dampening effect on the housing market, the required hike in interest rates would in many cases be too large from the perspective of the economy as a whole and would consequently involve too much collateral damage.”
In December, APRA announced that bank mortgage lending would be more closely scrutinized and appropriate measures taken if necessary. But this research suggests finite regulations may be required from the prudential authority sooner rather than later.