For many home buyers and property investors, it is easy to pick and throw stones at the local market players and the government for the boom and doom of housing prices in the country. However, they might be barking up the wrong tree – as it turns out, global factors are actually pulling the strings.
A new report by the International Monetary Fund (IMF) suggested that the Australian housing market may actually be vulnerable to unexpected foreign shocks.
Citing the IMF report, the Australian Financial Review said foreign investors and central banks now constitute a big part of what affects home prices.
"Increasingly, house prices have become determined at the global level. Local factors, such as land-use regulations, tax policy and demographics, still account for most of the variation in house prices, but during the past three decades house prices have become increasingly synchronised across countries, especially among major cities," IMF said.
With this, IMF stress that policymakers should not overlook the possibility that external shocks could suddenly have an impact on local markets.
Two Australian cities, Sydney and Melbourne, are particularly exposed to global risks due to their integration to the international capital flows which are steered by foreign investors looking for higher yields in low-interest-rate environments.
"Cities in advanced economies may be particularly exposed to global financial conditions, perhaps owing to their integration with global financial markets or to their attractiveness for global investors searching for yield or safe assets," IMF said.
With this, governments and regulators are encouraged to pay close attention to offshore markets for risks such as rising interest rates.
IMF said such dangers may see foreign property investors in Australia to withdraw as borrowing costs increase in their local markets even if the Reserve Bank of Australia maintains its cash rate steady.
"Heightened synchronicity of house prices can signal a downside tail risk to real economic activity, especially when taking place in a buoyant credit environment," IMF said.
The fund also noted that the house price synchronisation is particularly apparent during massive crashes: a dismal house price crash in the US could have a huge impact in Australia, damaging its economy to the point where it would not be easy to recover.
“In this case, a decline in external demand may exacerbate the challenges of stabilising household balance sheets, financial markets and economic activity,” IMF said.
What can Australia do to protect, or at least reduce, the impact of global factors? IMF said macro-prudential policies would be effective in serving like a firewall.
“Macro-prudential policy measures put in place to tame rising vulnerabilities in a country’s financial sector may have the additional effect of reducing a country’s house price synchronisation with the rest of the world," IMF said.
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