What OECD really said about nation’s property market

This week’s OECD report offers the rarest commodity in economic analysis: a report free of bias about house prices.

For Australian investors and home buyers alike, this week’s major report from the Paris-based Organisation for Economic Co-operation and Development offers the rarest commodity in economic analysis: a report that is utterly free of local bias or the conflicts of interest that riddle so many of the statements we see on house prices.

The prime danger, of course, is not that the OECD may not have done its homework. Rather, the risk is that the agency has been warning for so long on Australia’s overheated residential market that nobody is listening.

Hopefully, local investors are indeed listening because the report spells some key details that you won’t hear from the often academic leaders of the RBA or the experts in banks and property agencies who are understandably careful not to damage the industry on which they feed.

In forceful language, the OECD says Australia risks a rout if house prices fall sharply — the agency warns a fall in the housing market will be not be contained … it will bring the rest of the economy down with it. Or to quote the formal language of the agency ­directly: Australia risks a ‘sig­nificant downward correction that spreads to the rest of the ­economy.”

And while the agency concedes the regulators — especially APRA — have “begun” procedures to try to rein in the market, they are limited to date.

The agency singles out the recent reforms where investor lending by banks has been limited to 10 per cent growth a year.

Of course, the agency could not possibly have foreseen how what it calls our “privileged banks” behaved after APRA laid down its new rules last year. However, we know from the recent Commonwealth Bank results that the banks have actually orchestrated the execution of the new rules entirely to their advantage.

The chief executive of the ­nation’s largest home lender — Ian Narev, CEO of Commonwealth Bank — went as far as to suggest CBA had to lift its investor rates in recent times because of the new rules. Meanwhile, banking analysts are estimating that the higher rates allegedly spurred by APRA’s tighter lending policies will add $200 million a year to CBA’s profit this year.

While offering a broadly positive view of Australia’s wider economy and notably backing the RBA’s current “neither up nor down” stance on interest rates as “appropriate”, the agency does put a sting in the tail of these observations.

It says: “A side effect is a risk that accommodative policy may be increasingly distorting financial markets and, especially, house ­prices (which have risen to very high levels). Eventually, rates will need to be normalised.”

The agency then outlines a wider risk that the wider economy could also suffer even if house ­prices were to remain untroubled: it outlines a scenario where the current commodity upturn may not extend into the years ahead while the investment in non-residential assets does not take off.

It does, however, offer some reassurance that historically Aus­tralia has shown a strong ability to withstand “shocks” … of course, every shock is different to the one before.