Australian house prices ‘dangerously dumb’

OUR “dangerously dumb” house prices are 30 per cent overvalued and vulnerable to a crisis in China that would plunge us into recession, economist warns.

A CRISIS in China could plunge Australia into recession, push house prices down by nine per cent and wipe out nearly $1 trillion of our household wealth, a prominent forecaster has warned.

Australian households have “borrowed up a storm since the GFC” and housing prices “are now dangerously dumb”, according to Deloitte Access Economics economist Chris Richardson, who estimates house prices are 30 per cent overvalued.

Mr Richardson, speaking at the National Press Club on Wednesday, said Australia was “now more exposed to the economy of a single nation than we’ve been at any time in the last two-thirds of a century”.

“There are big risks here,” he said. “Australia’s gains from our relationship with China have been immense, but our dependence on China has also become huge. We now have a lot of eggs in the China basket.”

While Deloitte does not forecast a China crisis, it is “entirely plausible”.

“China has built too much, and it has relied too much on debt to do that,” he said. “There’s overcapacity everywhere from steel to housing.

“A bunch of businesses will find it impossible to pay the interest on their borrowings. And China’s leadership has kept using stimulus. Although that delays the eventual adjustment, it also worsens it.”

Mr Richardson said while Australia had “motored through” the GFC pretty well, we no longer have the ammunition to fight a recession should China stumble.

With the official cash rate at 1.5 per cent, the Reserve Bank “can’t go much lower”. The Australian dollar is lower than it was in 2008 and 2009, so it “probably won’t fall as far as it did last time”. And the Federal Budget is deep in the red, meaning less for stimulus spending.

“Compared with the global financial crisis, Australia’s vulnerabilities are higher, our defences are weaker, and this time around China would be a cause of the problem rather than a part of the solution,” he said.

Mr Richardson forecasts unemployment would jump and growth would slump. By 2019, the economy would be $140 billion worse off, there would be half a million fewer people with a job, house prices would fall by 9 per cent and the share market by 17 per cent, sending nearly $1 trillion of wealth “up in smoke”.

The Australian dollar would fall 15 cents against the US dollar, driving up inflation. Average business sales would fall 8 per cent, while profits would drop 19 per cent.

There would be winners, however, with farmers and manufacturers benefiting from the lower dollar, and beverage makers also doing well.

“Australians drink more in recessions,” Mr Richardson said.

He warned that the hit to the Federal Budget in this scenario would be $40 billion in 2019-20 alone.

Deloitte, which modelled three different scenarios using 200,000 data points, also looked at what would happen “if Asia does even better than we expect and Australia has the courage to reform”, and what Australia would “look like if we get better at being ‘cyber smart’”.

In the first scenario, Australia’s economy would be 2.5 per cent larger and $800 billion better off over two decades. In the second, a “double whammy” of higher wages and more jobs would “lift the living standards of Australians by 1.5 per cent two decades from now”.

“Lots of things could happen,” Mr Richardson said. “You might want to worry about the potential for a zombie apocalypse. That’s fine. Feel free to stock up on tinned food.

“But in Australia and around the world we’ve become too worried over the past decade ... Chances are that increased uncertainty is here to stay, so doing nothing doesn’t seem like a particularly smart option. Instead, I’d say there’s only one smart way to tackle fear of the future — by shining a light into the darkness.”

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