Australian Housing Bubble Could Pop

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The International Monetary Fund (IMF) has warned that rising interest rates in the United States could trigger overpriced assets – such as Australian property – to “unwind in a disorderly manner”. The IMF’s warning comes as global stock and property markets have surged despite the pandemic’s crippling economic damage. House prices in Australia have grown at breakneck speed despite the recession, dipping briefly in mid-2020 before posting several months of consecutive growth. Global stock markets have also grown by double digits. However, IMF chief economist Gita Gopinath on 6th April warned the global recovery would be derailed by a ‘divergent’ pace of recovery and rapidly rising interest rates. This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies. The global economic recovery faces “high uncertainty” and is threatened by the “dangerous”, “divergent” pace of recovery that will see developing countries’ living standards fall lower than pre-pandemic levels, Gopinath said. AMP Capital chief economist Shane Oliver told that dramatically rising interest rates would cause “debt servicing problems, people to default on their loans, recession potentially and then house price declines”. But the Reserve Bank of Australia has signalled repeatedly that it is unlikely to raise interest rates until 2024, though some pundits believe it could happen sooner. Australian dwelling values posted its fastest rate of growth in 32 years in the month of March, with CoreLogic figures revealing median standalone house prices in Sydney alone rising by $51,000 in the space of a month. RBA governor Philip Lowe acknowledged that home values had strengthened, in part due to strong demand from first-home buyers, and signalled lending standards would be on a short leash. Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained. But I just want to be really clear that it is not our job, and has never been our job, to solve the problem of rising house prices. The IMF is predicting global economic growth of 6 per cent in 2021 and 4.4 per cent in 2022, figures that have been revised up from its October 2020 predictions.