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The Australian housing market is between 20 and 30 per cent overvalued, leaving Australia open to an international economic shock, warns a former Reserve Bank of Australia (RBA) economist.
The overvaluation of the property market is fuelled by policies that make acquiring large home loans too easy, leading Australian economist Jeremy Lawson said in an interview with the Australian Financial Review.
Mr Lawson criticised fiscal policy settings, suggesting the RBA’s organisational culture was blinkered and low interest rates are pushing house prices out of line with fundamentals.
Mr Lawson is the global chief economist of British fund manager Standard Life.
He was a former senior economist at the Reserve Bank of Australia (RBA) and the OECD, and adviser to former prime minister Kevin Rudd.
"Overall financial conditions have probably been too loose and that has undermined longer-run financial stability," Mr Lawson said.
He stated the boom in the property market is the result of increased money supply through easy monetary policy and a reluctance of institutions to implement “macro-prudential tools”.
House prices are 26 per cent above their peaks before the financial crisis and 11.2 per cent higher over the 12 months ending August 23, RP Data said.
RP Data also reported there are now 417 suburbs in Australia with an average price of more than $1 million, a rise of 33 per cent in just one year.
Mr Lawson said it was dangerous for the RBA to focus too much on the credit growth rate rather than the amount of credit.
Housing credit growth is more than twice wages growth and has pushed the household debt-to-income ratio to over 150 per cent, just below pre-crisis heights, Mr Lawson said.
"A high debt-to-income ratio leaves households much more vulnerable to income and interest rate shocks," he added.
Mr Lawson warned that the Australian economy was too closely connected to Chinese trade and if China was to experience a sharp downturn, the Australian economy would suffer substantially.
"The painful choices governments will need to make at that time will make the ruckus over the May Budget look like a minor skirmish," he said.
He also warned that while Australian debt metrics were good, Australia's structural fiscal position has deteriorated significantly over the last 10 years, meaning Australia is "very vulnerable to the next big global shock", which he said could come about due to the breakdown of the relationship between the West and Russia.
- <p>...As opposed to FIRE spruikers! But but but, Australia's different!</p>0
- <p>How about the wasted Howard years splurging a once in a lifetime mining boom. With no real reform? NO ONE does real reform anymore.</p>0
- <p>OMG are you for real?<br>a) Kevin Rudd started with $20bn in the Kitty & left us over $600bn in DEBT.<br>b) The was NO GFC in Australia period! The only sectors that were duly affected were the Tourism & Export sectors that had to deal with the higher $AUD, there rest of the economy was ticking along Ok because of the Mining Boom.<br>c)I really really wish Australians started educating themselves on just how far gone this Country is, being a slave to New World Globalism, Growth & Political Corruption!<br>d) WAKE-UP because the NEXT-REAL Global Financial Crisis will be far far WORSE than anything you could imagine & the WORST part, its all done by Design through Corporate & Global Governance!!!</p>0
- <p>that's exactly right Bjorn, and by doing that he wasted so much money ( which was never there to waste ) he buried the country for the next 10 years - is that what turns you on ?<br>you can't be serious <br>DGM</p>0
- <p>If you want 4 opinions you ask two economists - this is just another person with another spin on the property market - I mean he says if China was to experience a sharp downturn, or if there is a breakdown in relations between east and west, the property market may be affected. So will everything else. He must be a rocket scientist....and these experts always say "if this happens it may result in........". We could all say this about anything. I was surprised he admitted being an adviser to Kevin Rudd - there goes his credentials.</p>0
- <p>Kevin Rudd and the Labor Government were like kids in a candy shop spending money left right and centre. As history has told us The Liberal Party has to come and clean up the mess that Labor creates, after we get back to the black labor will be voted in and bang it will happen all over again...<br>Kevin handed out a buffer for everyone but what people didn't realise is that you always have to pay the piper and with a stimulus like that it was coming and is here now in the form of a "wake up" budget.</p>0
- <p>Bjorn - I think you'll find that Kevin Rudd just kicked the can down the road a little further. He's ruined the future of this country by selling out on the day. Property needs to re-balance to allow business and investment to grow. If people spend 60-70% of their after tax income just housing themselves, that leaves little left for social, investment, planning, funding etc etc. Basically they're left with nothing to pump into the wider economy, which then leads to business closures and ultimately your unemployment!! Good to have a cheap mortgage on 'Record Low' interest rates, but if you're unemployed and haven't been able to save diddly squat you won't be able to pay your mortgage - no matter what the interest rates are! (And remember - 'Record Low' interest rates indicate the issue - they aren't at Record Lows because we're going Gangbusters)</p>0
- <p>The focus is always on the Capital / Metropolitan Cities in these Economic Reports, you will find its a different story in the Regional areas.</p>0
- <p>Jamie.... Kevin Rudd kept our country from recession. </p>0
- <p>Jeremy Lawson's comments should not come as a surprise to anyone. Loose bank lender is still occurring, Government intervention with FHOGs in what should be a free market has & still distorts the market. How can a single fronted weatherboard home in Richmond/Fitzroy et al with 2 bedrooms, unrenovated sell for $700,000 or worse seeing similar homes in Port Melbourne or Hawthorn making $1.5 million. It is unsustainable. It is of course a totally different in regional areas which gives sellers in these expensive cities the opportunity to down size to regional areas & free up retirement income & get a better lifestyle.</p>0
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