With the average Australian home being 25 per cent overvalued, a leading economic forecaster believes that prices could dramatically unwind once China's economy deteriorates.
Deloitte Access Economics said in a report that China's economic slowdown is a bigger threat to Australia's prosperity compared to Britain's decision to exit the European Union. There has been a surge in borrowing in China, where debt levels are already high.
"China just kicked the can down the road, slowing down the adjustment it has to make away from construction and away from debt," said Deloitte partner Chris Richardson. "This is a highwire act, and the Chinese authorities just waved away the safety net."
Chinese businesses and government are taking more debt to solve the problems stemming from too much debt. This could lead China to spiral into a debt crisis, affecting Australia's commodity exports and spiking unemployment.
"China has built too much and it has borrowed too much to do so," Richardson said. "And the extra protection from lower exchange and interest rates and government stimulus wouldn't stop considerable pressure on Australian housing prices."
Though Aussies may feel wealthy because of soaring house prices, consumer splurging may end up unsustainable as it is not coming through higher wages.
"The more that housing prices rise now, the greater the risks they will pose later on," Richardson concluded
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