China’s economy ‘key’ to whether Australian house prices drop

WITH more Aussies struggling to buy their first home, experts have a scary prediction about what will finally bring property prices under control.

SHOULD Aussies struggling to break into the property market wait for a recession?

Prominent economist Chris Richardson says people shouldn’t be too downhearted by the state of the economy, because it could be worse.

The news comes as speculation rises that a recession could be the only way to bring down soaring house prices in Australia. Experts say high property prices are the “new normal”.

The director of Deloitte Access Economics said while “below trend growth” sounded disappointing, people should actually be cheering.

“History and economics both say Australia’s largest ever boom could have ended in our biggest bust,” he said in his latest business outlook released on Monday.

“Be happy it didn’t.”

His comments came after two consumer sentiment readings last week showed a tumble in confidence, after fears that financial problems in China and Greece could further undermine the Australian economy.

Mr Richardson told Business Spectator: “The chance of a recession is higher now than it’s been for quite some time. China’s economy is the key.”

Mr Richardson admitted there were higher than usual uncertainties, but he said it meant lower interest rates would be locked in for longer.

“Cheap credit will be around for a while longer yet,” he said.

However, he does not expect the Reserve Bank to cut the cash rate again, which is already at a record low of 2 per cent, because it has been spooked by housing prices.

But financial journalist Alan Kohler wrote in the Business Spectator that the Reserve Bank believed the only thing that could bring down housing costs was a recession.

“The problem, in short, is that Australian house prices are not in a bubble, and are, instead, in a ‘new normal’ and are not going to come down on their own,” he wrote.

“A recession is becoming more likely thanks to the slowdown in China, exacerbated in the past month by the bursting of its stockmarket bubble, but that would hardly make home ownership more affordable.”

Earlier this week, research from ANZ Bank economist David Cannington showed low interest rates may make repayments easier but it was much harder for first home buyers to save up a deposit to get on the market.

“The lower discount rate that investors apply on future gains can justify a higher present value,” he told the Spectator.

“Combined with strong underlying supply-demand fundamentals for housing, this indicates house prices are approaching a higher ‘new normal’ and home deposit affordability is likely to remain difficult for new entrants.”

He said while loan servicing was improving, the real hindrance for first home buyers was getting the deposit.

Originally published as China’s economy ‘key’ to whether Australian house prices drop