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OECD: Australian housing is on the brink of 'dramatic and destabilising developments'

Photo by Bill Pugliano/Getty Images

Australian house prices are surging again with the latest RP Data Core Logic data on capital city house prices showing prices up 5% in the first five months of 2016.

That acceleration has caught many by surprise and may complicate the outlook for the RBA as it seeks to anchor consumer inflation expectations with another rate cut in the months ahead.

To some it’s just another sign of the risk to the economy from rampant housing markets.

The Organisation for Economic Co-operation and Development (OECD) is one of those global bodies warning about the risks housing now poses to Australia. In its latest economic outlook the OECD says Australia may be on the brink of a messy end to the housing boom.

“The unwinding of the housing market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing,”the OECD said.

But, strangely, the OECD also says that “with receding risks from the housing boom, there is leeway for further monetary policy easing in the event of a new downturn”.

The apparent contradiction in these two statements is clear. But what the OECD is trying to highlight is that, like any market, once the housing market starts to unwind, the downward spiral can take on a life of its own.

Yet the type of unwind matters.

There are many ways this current boom in house prices can unwind. The gloomsters would say house prices must crash. The optimists will say there is no reason this should happen, while more considered voices, like Paul Dales, Capital Economics Australia/New Zealand chief economist, said recently that Australian house prices won’t have a US-style collapse, but they will fall.

For all the worries about price rises and risk in the market, and even given recent concerns at the big banks about loans to offshore borrowers, Dales implies the structure and lending standards of the Australian market inoculate it against a US-style crash.

He says lending standards and the fact that the majority of loans are fully verified assuage his fears of such an outcome.

Likewise, as the latest RP data shows, prices appear to now be rising without the destabilising impact of investor growth. That suggests it might just be a healthy economy and lower rates driving prices.

That sets up a very different outlook to the one the OECD fears.

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