Have a mortgage? This warning from the PM is for you
THE Prime Minister has issued a quiet warning to Australians investing in housing that they cannot continue to assume house prices will only go up.
"Clearly you need to remember that asset price movements go in two directions," Prime Minister Malcolm Turnbull said after a speech to an economics conference this week.
In particular, this is relevant to housing. "It has been a pretty good one-way bet for a long time - but it is going to be important for people to be prudent."
Mr Turnbull made the comments alongside an observation that interest rates have risen for many borrowers.
Interest rates are a big factor in the housing market. The lower the interest rate, the more you can borrow from the bank and the more you can pay for a house.
Australians have borrowed a lot, and for now the risks of borrowing have been well managed, Mr Turnbull said. But that could change.
"High levels of indebtedness that are incurred with low levels of interest rates always pose a risk when you have the prospect of an increase in rates. Particularly if it has all been built on an assumption of rising asset prices."
Interest rates have been at record lows until banks recently tweaked up rates on certain investor loans. Higher interest rates across the whole housing market could be next.
Financial market pricing hints that official interest rates are more likely to go up than down when the RBA next makes a move, perhaps in 2018.
Mr Turnbull made his comments at the Economic and Social Outlook Conference, presented by the Melbourne Institute and The Australian. At the conference, which was thronging with people who watch the Australian economy with laser focus, Mr Turnbull was far from the only speaker worried about Australian house prices and debt.
Melbourne Institute Professor Guay Lim presented some frightening statistics to the conference, pointing out that Australia's ratio of household debt to net disposable income is over 211 per cent, one of the highest in the developed world.
"The disturbing part of this picture is the burden of the debt is not evenly spread," Professor Lim said.
While the majority of debt is held by wealthier people who are more likely to have capacity to pay it back, a smaller but more worrying part of the debt is held by people who might not be able to.
For example, Professor Lim cited statistics showing 28 per cent of households where the reference person is unemployed have owner-occupied housing debt.
The shadow Treasurer, Chris Bowen sounded a warning too, and had a ready-made solution.
"I do think that household debt is a concern," Mr Bowen said. "Australia's high household debt is top of that list."
He went on to link the high household debt to negative gearing policy. (Making interest payments on investment housing tax deductible naturally encourages people to borrow more.)
Labor has pledged to reduce the tax advantages available through negative gearing. The policy was quite popular at the 2016 election - at which point house prices were rising. But the prospect of interest rates tipping house prices into the negative means negative gearing changes is not a guaranteed winner at the next election.
While a moderation in house prices could be very welcome for first home buyers, a rapid housing collapse could do serious damage to the economy. If house prices fall, the plan to ditch negative gearing might itself get ditched for fear of driving prices down further.
And if prices do fall and start to wreak havoc in the economy, it would come just as things start to look brighter. New employment statistics show the Australian economy added 62,000 extra full time jobs in June, in seasonally adjusted terms.
But of course that's the paradox - a healthier economy should cause higher interest rates, and it is those higher interest rates that could bring the long surge of house prices to an end.