Are we heading for a house price crash?

Reliance on China has left Australia vulnerable, says IMF

Australia’s housing market could go into a tailspin if there is a collapse in China, according to The International Monetary Fund (IMF).

In its latest report the IMF warns that shocks in Europe or Asia could undermine Australian house prices. In an interview with the Australian Financial Review, IMF deputy director Masahiko Takeda has urged Australia to broaden its economy.

“The mining sector and prosperity from that can lead to potential vulnerabilities because you are putting too many eggs in the one basket”, he said.

“Australia should seek to ensure it has multiple engines of growth going forward”, he added.

The report also suggests that Australia could suffer financial and economic fallout from an intensification of the European debt crisis and a hard landing in emerging Asia, especially China, possibly compounded by a sharp decline in commodity prices. That could trigger a cascade of negative events including falling mineral exports, deteriorating terms of trade and reduced household incomes leading to a fall in house prices.

Many commentators have suggested Australian houses are already overpriced. The Economist, in its August update, said Australian house prices were still 36% above their fair value. “After years of dizzying ascents, a big dose of gravity has hit residential property markets around the world”, the magazine says.

If property prices slide, then Australian banks including the big four, Australia and New Zealand Banking Group (ASX: ANZ)Commonwealth Bank of Australia (ASX: CBA)National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), may be affected, because they have to borrow money overseas to finance local mortgages.

BHP Billiton (ASX: BHP) has also warned that up to 25% of exports are at risk as China’s growth slows.

The Foolish bottom line

Australia has had it good for a long time, with 21 years of consecutive GDP growth. Many indicators now suggest the worm may have turned.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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