Quarterly correction could turn into a crash

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Australia’s world record housing boom, which saw home values soar by more than 6,500% over a 55-year period, could be on its last legs after house prices fell in Sydney for the second month in a row, according to economists from UBS, the Zurich-based global financial services company.

The latest housing market correction could turn into a full-blown crash if the Reserve Bank hikes its benchmark interest rate too soon, warns George Tharenou, chief economist at UBS.

“People underestimate [their] sensitivity to interest rates,” Tharenou said at a market briefing in Sydney last Friday. “If the RBA hikes too much or too early, it runs the risk of turning a quarterly correction in the housing market into a crash.”

Rising asset prices, declining savings, and consumption that has outpaced wage growth has left Aussies particularly vulnerable to interest rate hikes, Tharenou said. Moreover, the recent price surges in Australia’s hottest property markets has left people feeling confident about their wealth, and many spend more than they save. 

House prices in the capitals have continued to slow on a quarterly basis, driven in part by the Australian Prudential Regulation Authority’s (APRA) macro-prudential restrictions on interest-only mortgage lending, which were announced towards the end of March.

The slowdown was led by Sydney, where home prices declined by 0.6% over the quarter and dropped 0.5% over the month, according to CoreLogic’s October Home Value Index Results.

RBA Governor Philip Lowe said the central bank is likely to keep the current record low interest rate unchanged while it waits for a gradual return to healthy levels of inflation, wage growth, and economic growth.


Related Stories:
Property Sellers Are Optimistic About Prices
Rate Of Growth In Dwelling Values Is Slowing

 

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