Big warning for housing market

Thinking of buying a home? Take a look at what a million dollar home looks like in each Australian capital city.

THE OECD has warned of a “significant” rout in Australian house prices, in a market correction that could spell economic gloom.

In an otherwise positive assessment of the nation’s economy, the Organisation for Economic Cooperation and Development noted in its biennial survey that house prices have increased by 250 per cent in real terms since the 1990s — and that a downturn could cut household consumption and lead to mortgage defaults.

“House prices and household debt have reached unprecedented highs,” the report released on Friday said.

“A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy.”

The authors said that while there were signs that the housing market was cooling, “the significant increase in Australia’s house prices and price to income ratios remains”, with affordability for first-time buyers a major issue in Sydney.

Other risks facing the Australian economy included US interested rate policy, the ongoing fallout from Brexit, rising international protectionism and the performance of China — but the OECD believes Australia is well positioned to handle such potential shocks.

“The speed and strength of the rebalancing processes in response to the end of the commodity boom auger well for the economy’s shock-absorbing capacity,” it said.

The Paris-based institution says the economy also has the capacity to cut interest rates further and provide fiscal stimulus “than many other OECD economies”.

Meanwhile, a renewed plunge in global iron ore and coal prices could cause further cost savings and investment cuts among mining companies, impacting on jobs and incomes.

As it stands, the OECD believes Australian living standards and wellbeing are generally high, but says the adjustment to the end of the commodity boom has not been painless.

Unemployment has risen and there are increasing concerns about inequality, the report said, noting that the large socio-economic gaps between Australia’s indigenous community and the rest of the population remain.

There are some very good reasons not to trust those claiming that the key numbers in Australia’s property market are still reasonable.

It urged developing innovation-related skills, which it said were important for the underprivileged to gain work and those displaced by economic restructuring, while helping to reduce gender wage gaps.

“Merely maintaining long-run average productivity growth jeopardises this success,” it said.

The survey was finalised before this week’s national accounts, which showed a marked turnaround in the economy after a weak spot last year, resulting in an annual growth rate of 2.4 per cent at the end of 2016.

In the survey, the OECD forecasts growth of 2.6 per cent in 2017, rising to 3.1 per cent next year.

This will see the unemployment rate ease from 5.5 per cent this year to 5.3 per cent in 2018.

The jobless rate was 5.7 per cent in January.

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