Australian property is overvalued by between 20 to 30 per cent according to one of the country’s top economic experts. Ex-RBA official Jeremy Lawson is now the global chief of Standard Life, a large British fund manager and once advised opposition leader Kevin Rudd. Mr Lawson said the overvalued housing market leaves Australia vulnerable to a big economic shock.
Speaking in an interview, Mr Lawson;
- criticised fiscal policy settings
- suggested the RBA’s organisational culture was insular
- said there was bias towards big banks in the financial system inquiry panel
- argued low interest rates were pushing house prices out of line
” It is reasonable to assume that future house prices will grow in line with real household disposable income as the commodity boom unwinds,” he said.
“That would imply overvaluation of between 20 per cent and 30 per cent.”
RP Data figure say house prices are 26 per cent higher than their peaks before the financial crisis and 11.2 per cent higher to the 12 months to August.
Mr Lawson said the RBA was too reliant on interest rates to manage the economy.
“Part of the problem is that rates are being relied on to do too much work,” he said.
“Given the risks, I would like to see the RBA and APRA make much more active use of macro-prudential instruments. That way you can have both low rates to support the overall economy while maintaining tighter credit conditions for riskier sectors.”
The RBA says there is little threat of a house price bubble because annual housing credit growth of over 6 per cent is acceptable.
Mr Lawson said the RBA should focus on the amount of credit just as much as the credit growth rate. Housing credit growth is more than double wages growth, and the household debt-to-income ratio is out to over 150 per cent.
“A high debt-to-income ratio leaves households much more vulnerable to income and interest rate shocks,” Mr Lawson said.
“The Australian economy is highly leveraged to a very unbalanced economy and if China experiences a sharp economic downturn, Australia’s fiscal position will deteriorate substantially.”