Indebted Australian Homeowners Face Price Deflation

We saw what happened when the U.S. housing bubble burst during the 2007-2009 financial crisis.

Now, Australia's housing market boom has started to fizzle out. Those who bought a home near the top face sizeable mortgage payments as some home values fall. The matter is made worse by stagnant wages.

The Sydney Morning Herald says the Reserve Bank of Australia may fight the nation's housing slump with a low interest-rate policy:

Without rising wages, it becomes harder and harder to pay off ever larger mortgages. Against the backdrop of flat property prices, this could spell trouble for some home buyers who are heavily in debt.

As the Reserve Bank frets over the lack of inflation, this has sparked speculation it will slash the cash rate to around 1 per cent to 1.5 per cent before the rate-cutting cycle is finished. It is worth bearing in mind that for much of our recent economic history deflation has been just as evident as inflation.

A research paper published by the Bank of International Settlements in March last year pulled together pricing trends for all economies where data existed to analyse the impact of deflation. ...

The study found only a weak link between deflation in goods and services and economic growth. ...

But of greater concern, the study found, is property price deflation at times when it is coupled with high private debt -- and perhaps it is in this context the Reserve Bank's concerns with deflation should be considered.

"Asset price deflations, particularly house price deflations in the postwar era, have been more damaging," the study found, with "evidence that high private debt levels have amplified the impact of property price deflations" but with no similar link with price deflations for goods and services. ...

From investors trying to figure out which way markets are headed, to home buyers with large mortgages waiting for wage rises to get them on top of their repayment schedules as property price rises slow, hoping that the present pressures on inflation will soon run its course may be tempting. But if history is a true guide, the reality could be more complex.

You can read the entire article by following the link below: