‘Dangerously dumb’ property boom will end in ‘regret’: Deloitte

Released yesterday, the Deloitte Access Economics business outlook for the March quarter noted that interest rates have been so low for so long now that cheap credit seems normal to Australian borrowers.

Record-low rates have driven significant gains in property prices in key capital cities, with Sydney leading the pack. However, this could be about to change with global markets pricing in more inflation and growth and rate hikes expected from the Reserve Bank over the coming years.

“We don’t see Australian rates starting to rise until 2018 – but rise they will. Housing prices are dangerously dumb, and the Reserve Bank won’t want to add further fuel to that fire,” the report said.

Deloitte warned that NSW will be worst off when rates rise and Sydneysiders in particular could find themselves in trouble.

“The better NSW looks now, the greater the troubles that this state is storing up for the future. Both history and economics suggests that a surge in housing prices tends to be followed by a period of regret,” the report said.

“We think that’s entirely likely this time too. As we regularly note, the joy of rising wealth eventually gives way to pain of servicing gargantuan mortgages. Interest rates are beginning to rise around the world, and, although official interest rates in Australia may not follow suit until 2018, that augurs badly for the disposable incomes of Sydneysiders.”

The dire warning comes after Deloitte Access Economics partner and top forecaster Chris Richardson last week claimed house prices are now 30 per cent overvalued.

Credit Suisse is confident that Chinese demand will soften the blow of the “coming downturn” as Australian property prices are still cheap compared to major Chinese cities.

However, Deloitte’s Chris Richardson has warned that any financial crisis in China would have major implications for the Australian economy.

In a speech at the National Press Club earlier this month the leading economist said that an economic crisis in China could send Australian real estate tumbling by as much as 17 per cent.

“If China did stumble, then the hit to the Australian economy would strip out $40 billion from the budget bottom line in 2019/20 alone,” he said.

“One bit of advice I give to young Australians is right now, amid our housing markets at the moment is don't buy.”

[Related: Chinese buyers to cushion housing correction: Credit Suisse]