Little chance of housing bubble building in Australia but China effect may be overstated: Saul Eslake

Economist Saul Eslake says he is not particularly troubled about the risks of a ‘housing bubble’ re-forming in Australia following Citi Research, which drew a similar conclusion.

The Citi Research report downplayed the risks of a housing bubble forming and forecast house prices to rise 3% between now and March next year before a “slight” 2% correction driven by the “powerful effect” of lower Chinese immigration, a weaker Chinese economy and a lower Australian dollar.

Eslake, chief economist at Bank of America Merrill Lynch (BAML) described the Citi Research as “really interesting, innovative and insightful” but remains circumspect about the impact of Chinese demand on Australian house prices.

“While I was aware of various pieces of anecdotal evidence linking Chinese demand to movements in house prices, this is the first time I’ve seen any rigorous attempt to quantify it,” Eslake tells Property Observer.

“In some ways it’s hard to see a causal link between Chinese industrial production (IP) and Australian house prices; and lots of things in Australia are correlated with Chinese GDP growth these days (including Australian GDP growth and, inversely, the RBA cash rate), so there might be an element of ‘double counting’ here. But it’s still a very interesting piece.

“More broadly, I’ve not been particularly troubled about the risks of a ‘housing bubble’ re-forming in Australia.”

Eslake says the present recovery in housing is weak by historical standards and is proportionately reliant on investors.

“I think households, particularly those who already have some debt, will continue to prioritize paying debt down over taking out new debt, which will inhibit non-FHBs, while FHBs are likely to remain apprehensive about their employment prospects and hence wary about entering the market.

“If there were signs of a ‘bubble’ developing because of low interest rates, the RBA in conjunction with APRA could use ‘macro-prudential instruments’ to reduce that risk.

These instruments could include mandating lower maximum loan-to-value ratios and shorter mortgage terms by requiring banks to hold more capital against mortgages.

“Canada has done both of these things and the recent New Zealand budget gave the Reserve Bank of New Zealand (RBNZ) power to do something similar if warranted.”