Australian property bubble could be about to burst: IMF

Australia’s home owners are among the most vulnerable in the world to a sudden sharp downturn in the value of their homes, authoritative new research has found.

In the April edition of its World Economic Outlook, the International Monetary Fund argues that Australia’s property market is the fourth most vulnerable in the world to a painful price correction.

The IMF looked at the extent to which increases in house prices between 1997 and 2007 are not explained by corresponding increases in the drivers of sustainable house price growth such as higher incomes or low interest rates.

It found the gap between house prices and underlying value fundamentals is close to 25% in Australia, with only the housing markets in Ireland, Netherlands and the United Kingdom in a worse condition.

It is not inevitable that Australia’s property bubble will burst, the IMF says, as rising incomes and moderate inflation could see real property prices fall in a more measured way.

But, ominously, the IMF says a house price correction could be more likely if incomes come under downward pressure and credit conditions tighten – factors that could emerge more strongly in Australia if our economy slows significantly and the global credit squeeze continues.

Reports of increased home loan defaults support the bubble side of the argument. Ian Graham, chief executive of mortgage insurer PMI, told the Australian Financial Review today that loan default levels have increased recently and are likely to continue to do so this year.

Another characteristic of Australia’s property market that is likely to continue in the medium term is rapidly rising rent levels.

Last year’s double digit growth in capital city residential rents is likely to continue over the next five years, equating with a 50% increase in rents between now and 2013, according to Australian Property Monitors research reported in newspapers today.