Aussie house prices vulnerable

By webmaster 19 May 2011 | 1 minute read

Over-valued prices and poor affordability is leaving Australia’s housing market exposed, according to AMP chief economist Shane Oliver.

According to Dr Oliver, a significant rise in interest rates or a hard landing in China could really hurt Australian house prices.

While Australia does not face a housing bubble per se, our high house prices remain an ‘Achilles heel’, he said.

“Reflecting a huge surge in house prices into 2003/2004 and solid gains since, Australian housing is way overvalued. This has gone hand in hand with a massive increase in household debt,” Dr Oliver said.

A collapse in the housing market is unlikely, Dr Oliver said, but there are certainly causes for concern.

“The overvaluation in Australian housing leaves it vulnerable to anything that leads to an increase in dwelling supply or threatens the ability of homeowners to service their mortgages,” he said.

A hard landing in China is one concern but the biggest cause for concern is interest rates, according to Dr Oliver.

“Four interest rate hikes, as some are suggesting, would knock affordability to a new record low.

“Further interest rate hikes, particularly before the economy has recovered from the current soft patch, risk knocking households over the edge and with them house prices. It would be best for the RBA to wait a while and then assess,” he said.

For house prices Dr Oliver said the most likely outcome would be an extended period of constrained range bound prices so income levels catch up, but the risks are on the downside, particularly if interest rates rise much further.

Aussie house prices vulnerable
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