AU Warned of 'Overheating House Prices' Despite Resilient Economy

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By Reissa Su | June 27, 2014 6:39 PM EST

An international ratings agency has warned Australia of its "overheating" housing market despite the country's "very high" economic strength.

REUTERS
A sold sign hangs from a for sale board on a housing development in Manchester, northern England June 7, 2011.

According to Moody's latest credit analysis of Australia, the real estate market was caught in the mid of a "positive price-feedback loop" in which high prices will lead to even higher prices. It warned Australia's housing market may face a correction. The ratings agency said the market's price-to-income and price-to-rent rations are rising to the levels above the recorded historical average.

Reports indicated eight of the country's largest cities have an average house price increase of 8.3 percent year-over-year. Moody's said this is the highest growth rate for house prices in Australia in almost four years.

The agency cited the country's lack of construction boom, strong mortgage buffers, low leverage levels and well-capitalized banking system will reduce the effect of a possible real estate market contraction in the economy.

Moody's analysis praised Australia's overall economic growth. It was described as "one of the world's most advanced" with an AAA credit rating due to its high government financial strength, resilient economy and low event risk.

The report also commended the Abbott government's current financial standing as "very strong" with a general debt at the lowest level of among AAA-rated countries with the exception of Luxembourg.

In May 2013, the World Bank has declared Australia as one of the most expensive countries in the G20 economy. Australia's cost of goods and services makes it at par with other expensive European countries like Denmark, Norway, Sweden and Switzerland.

Economists believe Australia's cost of goods and services has increased due to the mining boom, high exchange rate and "unbroken" economic growth for 22 years. They also cited low unemployment rate, high labor costs and oligopolistic major industries as the main drivers of high local prices.

The World Bank report only reaffirmed Australia as an expensive nation based on global standards. In January, the Economist Intelligence Unit named Sydney and Melbourne, among the top 10 most expensive cities in the world, based on a cost-of-living survey.

Sydney and Melbourne had ranked fifth and sixth, respectively, behind Singapore, Paris, Oslo and Zurich.

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(Photo: REUTERS / Phil Noble)
A sold sign hangs from a for sale board on a housing development in Manchester, northern England June 7, 2011.
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