The winter surge in Australia's residential property market has many independent observers – as opposed to real estate spruikers and the banks – increasingly worried. Australia is at risk of experiencing a delayed global financial crisis (GFC) effect, which would result in great stresses being put on the financial system.
The property market is growing at an annualised rate of 15 per cent, which, in an environment in which interest rates in developed countries are running at close to zero, is a suspiciously high return. Sydney is especially hot, with prices 40 per cent above their pre-GFC peak and 20 per cent above their November 2010 peak.
The main trigger is low interest rates. They are at once a symptom of what is wrong in the global financial system and a catalyst for what will soon be wrong. After the GFC, the only way for the United States and Europe to stave off complete catastrophe was to flood the system with money, effectively reducing the cost of capital in the economy to near zero. Interest rates around the developed world fell.
Australia's experience was different, however. Unlike most developed economies, especially the US, property prices did not fall sharply. As a result, there was not the same kind of pressure on local banks, which for the most part sailed through unscathed. There were many reasons for this. Former Treasurer Peter Costello's ability to run prudent federal budgets, which left Australia with exceptionally low government debt, was one. The China-driven investment boom in resources was another. The Rudd government's cash splash in 2008 was a skilful piece of timing, staving off recession. And the property market was greatly assisted by negative gearing and Australians' love of property.
Interest rates are only now falling in Australia in what can be described as a 'delayed GFC effect'. The cash rate is at a record low of 2.5 per cent and investors are starting to take riskier bets in property, desperate to get better returns than are offered by term deposits.
Many are sounding warnings. David Murray, former head of the Commonwealth Bank and head of the Financial System Inquiry, has said the banks should be shoring up their capital base to be ready for a correction in asset prices 'inflated by unprecedented global monetary stimulus.'
The Australian Prudential Lending Authority (APRA) has released data showing an increase in risky loans, including interest only loans. Investment loans are now 37.9