‘The debt burden has never felt so light’: Runaway housing prices could harm Australia’s longterm recovery, suggests a new international banking report

  • Runaway housing prices could pose a risk to Australia’s longterm pandemic recovery, suggests a new report from the Bank of International Settlements.
  • The annual paper says central banks will face risks if interest rates are hiked too soon, or if cheap money flows into red-hot housing markets too long.
  • The consequences could be heavy because “the debt burden has never felt so light,” the report states.
  • Visit Business Insider Australia’s homepage for more stories.

Runaway housing prices could end up costing advanced economies recovering from the COVID-19 pandemic, according to a new annual report from the ‘central bank’ to the world’s central banks, highlighting the risks inherent in Australia’s red-hot market.

In its Annual Economic Report, released Tuesday, the Bank for International Settlements (BIS) says the world’s most developed economies have mounted a surprising but largely uneven recovery from the shutdowns and disruptions of 2020.

Fears that “lingering risk aversion and contagion” would constrain spending “proved unfounded,” the report states, as the “craving for normality prevailed.” Pent-up demand, strong fiscal supports, and low interest rates have driven spending, the BIS said, echoing data from Australia’s own financial institutions.

The result has been an extraordinary growth in house prices in advanced economies, which have expanded despite comparatively easy mortgage conditions and subdued or suppressed rents.

But the future remains volatile. In addition to a relatively rosy scenario in which the “pandemic is steadily brought under control” and “consumption sustains the expansion,” the report postulates that the recovery could accelerate faster than central banks had anticipated, putting them on the back foot on interest rates, or that new variants of the virus could force governments and lenders to maintain generous fiscal and monetary conditions far longer than initially planned.

Each of these scenarios would have an outsized impact on homeowners, and the BIS says regulators should keep a keen eye on the sector, “a market that has been unusually buoyant for recessionary
conditions and whose downturns have been a catalyst for major economic weakness on many occasions in the past.”

The first alternate scenario, in which central banks lift interest rates earlier than expected, could lead to “a rapid and disorderly unwinding of positions taken on the assumption of persistently easy monetary conditions.” In other words, mortgage holders could find themselves with elevated payments far sooner than they may have anticipated, causing new financial strain.

The fact housing prices have climbed despite easy access to credit and comparatively low rental rates is an issue worth noting itself, the BIS states, saying the “apparent divergence between house prices and their fundamental determinants could make them more vulnerable to larger corrections in the future, especially if financial conditions become less accommodative.”

However, consistent access to beefy fiscal support and easy-breezy monetary conditions could eventually weaken banks and funnel Australia’s capital into unproductive sectors — an ongoing issue which the Federal Government recently addressed in the latest Intergenerational Report.

It won’t be an easy balancing act for central banks or prudential regulators.

On the one hand, there is the need to “provide sufficient reassurance to avoid a market-driven pre-emptive tightening of financial conditions,” the report states. “On the other, emphasising policy predictability poses the risk of constraining central banks, making them unable to adjust promptly if the economy surprises on the upside.”

As it stands, the Reserve Bank of Australia (RBA) is sticking to its gameplan — interest rates of just 0.10% until full employment is reached, which will hopefully spark wage growth, and then manageable inflation, with a cash rate hike some time in 2024.

Australia’s lenders see it differently, with Commonwealth Bank now speculating the RBA could have its hand forced as soon as 2022.

“The debt burden has never felt so light,” the BIS states. “Thus, normalising policy will not be easy.”