Australia’s property market headed for dramatic end says OECD

Could property prices fall off a cliff? The OECD thinks there’s a high risk

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In its latest economic report, the Organisation for Economic Co-operation and Development (OECD) says the “unwinding of housing-market tensions to date may presage ‘dramatic and destabilising developments’, rather than herald a soft landing for our property market.

In simple terms, the think tank sees higher than normal risk of Australia’s property market crashing and causing adverse waves through our economy, given the dependency of our economy on the housing sector.

The big four banks alone hold 80% or more of the mortgage market lending, so they are heavily exposed to any downturn, not to mention their lending to small and large property developers. And the latter category is the one that has most analysts and commentators jittery at the moment.

There are fears that the boom in apartment construction will see an unprecedented number of units come onto the market at the same time as many are due for settlement. Property developer Folkestone Limited (ASX: FLK) warned of the risks in August last year too.

Source: Folkestone Annual report
Source: Folkestone Annual report


That could cause chaos, particularly if a large number of new apartment buyers hand the keys back to the developers and forfeit their deposits.

Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) shareholders might have a valid reason to be worried too.

That could happen with a large portion of new unit buyers being foreign buyers and the banks’ recent crackdown on lending to foreign property investors. And if they see apartment prices sink,  they may no longer be willing to stump up the cash for a unit that’s not worth the price agreed at the start of construction.

And it’s mostly investors that have bought these apartments according to Domain.

House prices appear to have started slowing down according to the OECD, although recent reports by CoreLogic RP Data suggest the boom may have restarted after the RBA slashed the official cash rate to 1.75% last month.

Housing market is cooling OECD June 2016
Source: OECD

Foolish takeaway

The OECD report appears to be more ‘alarmist’ than anything else. A number of ‘experts’ have warned about the property market crashing in recent years, but perhaps their fears are overblown.

Having said that, if I owned a small investment unit in a high-rise apartment near in the CBD in Brisbane, Sydney or Melbourne, I’d be worried about long-term capital growth and rental returns in the short term.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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