Australia most exposed to housing debt downturn – The Australian Financial Review

“Australia looks most exposed, combining high household and external leverage, weak domestic housing conditions and potential further macroprudential and structural/tax policy adjustments ahead,” Morgan Stanley noted in new global report.

Australia is the most vulnerable large advanced economy to a household-debt induced downturn, according to a new analysis by investment bank Morgan Stanley, which points to slowdown risks from a tightening in lending standards and Labor’s planned tax changes for housing.

Morgan Stanley examined household debt burdens across G10 economies facing growth headwinds from deleveraging – essentially households paying down debt and consumers not taking on as much new debt.

Though Morgan Stanley economists Daniel Blake and Chris Read said Australia would enter a “benign” deleveraging phase, they highlighted risks of a slowdown in consumption from the effects of weaker house prices and slower credit growth.

“Australia looks most exposed, combining high household and external leverage, weak domestic housing conditions and potential further macroprudential and structural/tax policy adjustments ahead,” Morgan Stanley noted in new global report.

Morgan Stanley household deleveraging risk Morgan Stanley household deleveraging risk Morgan Stanley

“Strength in the global economy and support from public infrastructure spend are mitigating these headwinds, but the risk of a longer/deeper than usual balance sheet recession remains elevated, if these conditions change.”

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Canada and Sweden, which have also experienced debt-underwritten house price booms, were the next most vulnerable, according to Morgan Stanley.

Dwelling prices have dropped 2.7 per cent across the country in the past 12 months, with larger price falls in Sydney (-6.1 per cent) and Melbourne (-3.4 per cent), according to Corelogic.

Despite recent falls in house prices in Sydney and Melbourne, consumption has remained resilient, bucking the so-called “wealth effect” where a decline in asset prices can make people feel less wealthy and spend less.

HSBC’s chief economist for Australia, Paul Bloxham, said employment and income growth were much more important for consumption, than people’s home values.

Morgan Stanley household deleveraging risk Morgan Stanley household deleveraging risk Morgan Stanley

“There was very little evidence that there was a positive wealth effect when Sydney and Melbourne house prices were booming, and we think there is going to be less of a negative wealth effect on the way down.”

“Consumer sentiment is still above its average.”

Retail turnover continues to expand at a steady rate, with the CHEP Retail Index forecasting year-on-year growth to December 2018 of 3.9 perm cent.

David Rumbens, partner at Deloitte Access Economics, said “buoyant retail conditions in 2018 have been supported by a rundown of household savings, along with solid employment growth.”

The local household debt-to-income ratio has spiked to almost 200 per cent, a doubling in the past 20 years.

The Reserve Bank of Australia has periodically disclosed it is alert to risks from Australia’s high household debt and lofty house prices, though has signalled it would only be a major problem for the economy if it was accompanied by a rise in unemployment.

The RBA has said a large share of mortgage debt is held by high-income households and that many Australians are months ahead on their home loan repayments.

Two-thirds of household debt is owed by the top 40 per cent of the income distribution, RBA assistant governor Michele Bullock said in a speech in September.

The International Monetary Fund has repeatedly warned of risks to Australia from high household debt and elevated house prices.

Among several vulnerabilities listed by the IMF this month, it noted house prices were high in several advanced economies, including Australia, based on price-to-income and price-to-rent ratios.

“Household leverage stands out as a key area of concern, with the ratio of household debt to GDP on an upward trajectory in a number of countries, especially those that have experienced increases in house prices (notably Australia, Canada, and the Nordic countries),” the IMF noted in October.

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