IMF Sees Risk in `Mild Overvaluation' of Australian Housing Market Gains

The International Monetary Fund cautioned that housing in Australia may be overvalued and a reversal in prices could hurt consumers in one of the few advanced economies to skirt last year’s global recession.

“Given assessed mild overvaluation, a potential correction in house” prices “could hit household wealth and consumer confidence,” the Washington-based IMF said today in its World Economic Outlook. Housing in many other parts of the world remains a “drag on growth” and a risk to lenders, the fund said.

The IMF’s assessment came after Fitch Ratings said last week it will stress-test Australia’s mortgage market. House prices in eight major cities rose by 18.4 percent in the year to June, prompting some analysts to warn of a bubble.

The Reserve Bank of Australia said last week that the local property market shows “welcome signs” of cooling. The central bank’s six quarter-percentage-point interest rate increases in the past year added about A$3,600 ($3,500) a year to repayments on an average A$300,000 mortgage. The RBA kept borrowing costs unchanged at its meeting two days ago.

Speaking yesterday in Brisbane, Luci Ellis, the RBA’s head of financial stability, said Australian home prices in the past six or seven years have tracked household incomes “relatively well” and said signs don’t point to an overheated market.

Ellis cited a recent increase in returns on rental properties as a sign investors aren’t just focused on making money solely from the value of a property.

“Buying an asset because you expect the price to rise in the future, well, that is actually the academic definition of a bubble. So that would be undesirable and seen as a problem,” Ellis said. “I should mention that rental yields actually have come up a bit lately. We see the leveling off in housing prices as being desirable.”

Jeremy Grantham, chief investment strategist at Boston- based Grantham Mayo Van Otterloo & Co. and Gerard Minack, chief strategist for global developed markets at Morgan Stanley’s Australian unit, are among those warning of an Australian housing bubble, with homes about 40 percent overvalued.

Stress Testing

Fitch said last week it will test the impact on mortgage bonds, banks and insurers should mortgage defaults rise and house prices drop, and release results in the fourth quarter of the year.

“While a sharp correction in housing prices is not the agency’s base case, the fact remains that Australian house prices and household indebtedness remain significantly above the long-term trend,” Fitch said Sept. 29. “Investors are keen to understand the implications for ratings should such a sharp correction occur.”

Commonwealth Bank of Australia, the nation’s biggest mortgage lender, released a presentation last month saying such concerns are driven by a “superficial or incomplete analysis” of the nation’s property market.

The IMF, in today’s report, predicted the Australian economy will expand 3.5 percent next year after 3 percent growth this year. The country’s unemployment rate next year will likely average 5.1 percent, almost half of the euro-area level forecast to be 10 percent, the fund said.

To contact the reporter for this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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