Rising house prices are making Australian households “vulnerable”, according to a leading economist, however the Reserve Bank still needs to cut rates.
Real house prices have been running well above trend since the early 1990s and now sit at 14% above trend, says AMP’s chief economist Shane Oliver. According to the 2015 Demographic Housing Affordability Survey, the median multiple of house prices to household income in Australia is now 6.4 times, versus 3.6 in the US and 4.7 in the UK.
Australia’s high house price to income ratio means Australian households are vulnerable, says Oliver.
“High house prices compared to rents and incomes combined with relatively high household debt to income ratios suggest Australia is vulnerable on this front should something threaten the ability of households to service their mortgages,” he said.
“While this vulnerability has been around since the house price boom that ran into 2003 – with numerous failed predictions of property crashes – the
RBA is right to be concerned not to further inflate the property market.”
However, Oliver says there are some offsetting factors, so the property market should not be a constraint on further RBA interest rate cuts.
“First, home price gains are now narrowly focussed on Sydney. According to
CoreLogic RP Data Sydney home prices rose 13.9% over the year to March. But growth across the other capital cities ranged from 5.6% in Melbourne to -0.8% in Darwin with an average of just 1.5%,” he said.
“Second, growth in housing debt is running well below the pace seen last decade, and there are some signs of a loss of momentum in the last few months. Investor debt is up 10.1% year on year but reached around 30% through 2003 and in the last few months has slowed to an annualised pace of 9.3%.”
Oliver expects the cash rate to fall to 2% in May with a strong possibility rates will fall below 2% later this year, as the slump in mining investment intensifies, non-mining investment remains weak and iron ore prices remain deflated.
