The Australian housing market is between 20 and 30 per cent overvalued, leaving Australia open to an international economic shock, warns a former Reserve Bank of Australia (RBA) economist.
The overvaluation of the property market is fuelled by policies that make acquiring large home loans too easy, leading Australian economist Jeremy Lawson said in an interview with the Australian Financial Review.
Mr Lawson criticised fiscal policy settings, suggesting the RBA’s organisational culture was blinkered and low interest rates are pushing house prices out of line with fundamentals.
Mr Lawson is the global chief economist of British fund manager Standard Life.
He was a former senior economist at the Reserve Bank of Australia (RBA) and the OECD, and adviser to former prime minister Kevin Rudd.
"Overall financial conditions have probably been too loose and that has undermined longer-run financial stability," Mr Lawson said.
He stated the boom in the property market is the result of increased money supply through easy monetary policy and a reluctance of institutions to implement “macro-prudential tools”.
House prices are 26 per cent above their peaks before the financial crisis and 11.2 per cent higher over the 12 months ending August 23, RP Data said.
RP Data also reported there are now 417 suburbs in Australia with an average price of more than $1 million, a rise of 33 per cent in just one year.
Mr Lawson said it was dangerous for the RBA to focus too much on the credit growth rate rather than the amount of credit.
Housing credit growth is more than twice wages growth and has pushed the household debt-to-income ratio to over 150 per cent, just below pre-crisis heights, Mr Lawson said.
"A high debt-to-income ratio leaves households much more vulnerable to income and interest rate shocks," he added.
Mr Lawson warned that the Australian economy was too closely connected to Chinese trade and if China was to experience a sharp downturn, the Australian economy would suffer substantially.
"The painful choices governments will need to make at that time will make the ruckus over the May Budget look like a minor skirmish," he said.
He also warned that while Australian debt metrics were good, Australia's structural fiscal position has deteriorated significantly over the last 10 years, meaning Australia is "very vulnerable to the next big global shock", which he said could come about due to the breakdown of the relationship between the West and Russia.