Unemployment the real risk to Australian housing market

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A global credit rating firm believes unemployment is the greatest risk facing the Australian housing market.

According a Fairfax Media article, ratings agency S&P Global’s Asia-Pacific REITs' Large Buffer Will Bear A Downturn report claims that Australia’s housing market will remain relatively safe for the near future unless there is a significant spike in unemployment.

“We don't anticipate a sharp correction in house prices in the near term," S&P analysts Craig Parker and Graeme Ferguson wrote in the report.

“However, a scenario of the early 1990s where, unemployment reached 11% would place households under severe financial stress,” Parker and Ferguson wrote.

According to Parker and Ferguson, an increase in unemployment would pose an even bigger risk to the housing market if it coincided with a rise in interest rates as an increase in consumer debt in recent years has left households with little room to move.

“The rising household debt has lowered the headroom if the economy were to deteriorate or when interest rates rise," the S&P report said.

S&P’s cautious outlook for the housing market follows that of fellow ratings giant Moody’s who last week raised similar concerns about household debt levels.

Daniel Yu, a Moody's vice president and senior analyst last week said a recent uptick in the pace of house price growth could spell some trouble for Australian banks and the wider economy given the level of debt in Australian households.

“These trends are unfolding against a backdrop of already high levels of household indebtedness, and elevated overall leverage in the economy," Yu said.

"The current trends are therefore credit negative for Australian banks, particularly in the context of the banks' high ratings, because these trends raise the banks' sensitivity to any potential deterioration in the housing market," he said.

While S&P and Moody’s believe the housing market in Australia is relatively sound, not all commentators are of the same opinion.

In a recent report, the Organisation for Economic Co-operation and Development (OECD) claimed “close vigilance on housing-market developments is still required” in Australia.

“Domestically, the unwinding of housing-market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing,” the OECD report said.

“Uncertainties on future economic policy ahead of the Federal election, which is scheduled for 2nd July, are also adding a degree of risk.”

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