Aussies trapped in ‘commodity bust, housing boom’ cycle and the unwinding is going to be painful

There is an article published on financialpost.com dated 29/09/2016. I think it is worth to read.

Basically it argues that Australia is “having its central bank backed into a corner, forced to warn about the dangers of high debt and hot housing markets, while powerless to change interest rates as a commodity bust weighs on the economy.” Economists at Bank of America Merrill Lynch believe that Australia is heading for “an unwinding.” They blame the complicated situation on the crash in oil and metal prices, and a surge of money into real estate.

Bank of America Merrill Lynch lays out three scenarios for how the current housing boom will play out in Australia. They describe each scenario as “bad, worse and worst,” as all require a somewhat painful unwinding of the record debts accumulated by households.

The Baseline “Bad” Scenario

The baseline scenario involves a successful implementation of mortgage and housing policies, which avoids a housing crash, but household debt balances remain high. In this scenario, the Australia central bank maintains easy monetary policies. It doesn’t solve the debt problem which is of particular concern in Australia. Essentially, the status quo remains in the baseline scenario, with some easing of sales and prices.

The “Worse” Scenario

The “worse” scenario involves an overly aggressive tightening of policy, which leads to a sharp curtailing of demand, falling prices and sales. While domestic home buyers get cheaper houses, this scenario removes a significant amount of growth from each economy and forces the central bank to ease further.

Australia is particularly at risk in this scenario, because a huge amount of new supply is scheduled to come online next year in cities such as Sydney, and data shows that foreign buyers account for more than seven per cent of purchases — and growing.

The “Worst” Scenario

The “worst” scenario is one where Australia government is too timid on action, allowing the current real estate bubble to grow even larger. When government is eventually forced to act because of financial stability risks and populist pushes against growing unaffordability, the result is a much more serious price correction and potential housing crash.

No Happy Ending

Ultimately, BofAML says there is “no happy ending” for the current situation. The hope is that government and central bank at least make the right choices to tackle the problem sooner rather than later, and with the right tools.

You can read the full article here.

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