From the AFR comes a statement of the obvious today (at least for Sydney):
Quentin Grafton, the former head of the Australian Bureau of Resources and Energy Economics, will warn that last year’s 9 per cent national increase in property prices can’t be sustained.
“Should the house price growth spurt continue for much longer there will be an overshoot that will likely create an ‘overhang,’ ” he will say in a speech to the Australian Agricultural and Resource Economics Society.
Professor Grafton, now at the Australian National University’s Crawford School, predicts Australia’s ratio of house prices to incomes, which is the second highest in the world, will hit a record this year if prices continue climbing, as forecast by property experts, particularly in Sydney and Melbourne.
Professor Grafton will warn the Reserve Bank faces a “big ask” balancing the house price surge against the need to keep interest rates low enough to support growth.
“Given that Australia’s major banks borrow about 30 to 40 per cent of their funds from offshore capital markets, any rapid fall in house prices would pose a dilemma for the big four banks and would likely result in an Australian-made credit crunch,” he will say.
Grafton doesn’t spare shares, either:
“It is surprising to me given the immediate prospects for the Australian economy that investors in both equities . . . and fixed assets . . . are enjoying such stellar returns while the economy comes off from its glory days in 2011,” he will say.
“While the confidence of investors, with luck, may prove to be correct, I contend that the underlying risks, at least as of the end of January 2014, are grossly under-priced by the equity bulls.”
Such is financial repression, Quentin.
