The Australian economist for a leading global investment bank has warned that the nation’s over-inflated housing market poses a bigger risk of recession than a Chinese economic crash.
Speaking at a media briefing on Australia’s economic outlook, Bank of America Merrill Lynch chief economist Alex Joiner said recent property price rises have defied economic logic.
“The impetus for property prices just isn’t there,” he told journalists, referring to already high prices, record low rental yields for investors, very high household debt and low income growth.
Despite the lack of impetus, the latest CoreLogic RP Data figures show home prices jumped nearly 17 per cent in Sydney over the past year and more than 14 per cent in Melbourne.
The main factors explaining the boom in those two cities are record low interest rates – with the RBA’s cash rate at 2 per cent and many mortgage rates around 4 per cent – and expectations of future capital gains for investors.
However, Dr Joiner said interest rates are likely to start going up by late 2016 or early 2017, which would “inevitably see property prices come off”.
“We’ll do well to get out of this record housing cycle in relatively good shape,” he remarked.
Several global investment banks, including Goldman Sachs, have raised the prospect of an Australian recession over the next year, with some pinning those forecasts on a ‘hard landing’ for China’s economy.
Dr Joiner acknowledged those risks, but thinks a domestically-driven downturn is more likely for Australia.
He described a China hard landing as “high impact but low risk”, while seeing a “consumer-led recession” in 2017 as more likely, although not his base case scenario.
“A disorderly exit from the housing cycle is a higher risk event than a China hard landing,” Dr Joiner warned.
Bank of America Merrill Lynch’s chief economist in Australia said the Reserve Bank’s worst nightmare would be an inflation breakout sometime next year forcing them to raise rates earlier than they would prefer.
A 2016 rate rise would likely coincide with the peak in residential construction, expected mid-next year, and a continuing downturn in mining-related construction, with transport infrastructure investment not expected to add to growth substantially until 2017.
However, Dr Joiner said the first rate rise probably will not occur until early 2017, and subsequent rises are likely to be slow and limited – he sees the new neutral cash rate as likely to be around 3.25 per cent, rather than the old 5-5.5 per cent.
That means that Dr Joiner is expecting only moderate home price falls of 5-10 per cent, not a crash, and no recession with unemployment remaining close to current levels just above 6 per cent.
His equities counterpart at Bank of America Merrill Lynch – chief investment strategist Malcolm Wood – said one of his most certain forecasts was that the Australian dollar would fall further.
“Either way there’s got to be convergence in rates,” he predicted, saying that the Federal Reserve will soon raise US interest rates unless China’s economic slowdown worsens, in which case Australia would further lower its official cash rate.