PIMCO, the world’s biggest bond manager, has followed up on its report last month raising the alarm on Australian household debt, issuing another warning last night that Australian households are vulnerable to a housing correction. From ABC Radio:
AADITYA THAKUR: People are taking on more debt because they’re seeing prior houses price increases and assuming that those house price increases will continue into the future, and also, given the historically low levels of mortgage rates, they’re factoring that into the future as well.
This kind of response is somewhat concerning…
SUE LANNIN: PIMCO says aside from rising house prices and record low interest rates, tax incentives like negative gearing and accounts which allow people to withdraw money from their home loans encourage the obsession with property.
Laura Ryan is a research analyst at PIMCO.
She believes Australians are often blinkered when it comes to taking on a mortgage, choosing to borrow money more quickly than US consumers.
LAURA RYAN: Australian consumers don’t take into account other macro-economic variables such as the unemployment rate, GDP; whereas US consumers did take those factors into account, so it’s more driven by the wealth effect and how wealthy Australian consumers felt…
AADITYA THAKUR: So basically rental yields and house prices to income ratios across most developed countries, and this was data put out by the OECD, and it just shows that Australia is probably in the top quartile, so we think that housing is expensive, we’re not passing judgements as to whether it’s necessarily a bubble…
SUE LANNIN: He says if house prices fall sharply, for example, by as much as 20 per cent, then consumers are likely to start getting rid of debt quickly, which will hit economic growth.
AADITYA THAKUR: They will try to reduce their leverage ratios, and that really means pulling back on other forms of spending, and obviously if they pull back on spending then that will hurt businesses and their incomes, and hence that will have a broader impact on the economy.
“Irrational exuberance”, “panic buying”, “fear of missing out”, an “obsession with property”. These are all terms that apply to Australian housing. They are also reasons why the housing market is a bubble.
