S&P chief economist Paul Sheard says nation needs to guard against believing prices will continue to rise

Australians must beware of thinking that house prices will never fall because values have risen so consistently over the years, a leading global economist has warned.

Although the Australian housing market was not yet in bubble territory, Paul Sheard, chief economist at the ratings agency Standard & Poor’s, said on Wednesday that the country had to guard against believing that prices would continue to rise.

Sheard, an Australian-born economist who is an expert in the asset price bubble seen by Japan in the late 1980s, told the annual AB+F Breakfast with the Economists event in Sydney: “I don’t get the impression that we have a housing bubble here yet ... but I would say that Australia must be beware of the narrative that because prices have never fallen they can never fall again.”

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Referring to the 34% fall in house prices in the US after the global financial crisis, Sheard added: “It can happen and when it does it is difficult to reverse.”

However, the Australian-based economists on the panel were optimistic about house prices because of “strong fundamentals” such as low interest rates, low unemployment and sufficient population growth to support demand.

To cause a housing crash “history tells us that unemployment has to rise substantially or rates increase substantially”, said Su-Lin Ong, the managing director and chief Australian economist at RBC Capital Markets. Neither of those events were likely to happen, she said.

Overall the economy was performing well, the panel said, despite noting that consumer and business concern about the possibility of recession – so-called “dread risk” – was high and flew in the face of reasons to be positive about growth.

Shane Oliver, the chief economist at AMP, said people who had been predicting that Australia would suffer an “inevitable recession” after the mining boom had been proved wrong and were now trying to say the same thing about a housing crash.

But he said that the Australian economy had been surprisingly resilient and flexible. The post-mining boom drag was bottoming out and sectors such as education and tourism were benefiting from the lower dollar.

“It’s very unlikely that we’ll have a recession,” he said.

Westpac’s chief economist, Bill Evans, agreed, saying that different regions were seeing different rates of growth but “we shouldn’t be too negative”. He noted that while the $200bn liquid natural gas development boom was tailing off, it was being offset by $90bn of state infrastructure spending.

Ong said the weakness in wage growth was a problem for Australia and meant that the headline growth in GDP of 3.1% was “misleading”.

“Income weakness is a soft underbelly in the economy and is why the RBA had to cut rates,” she said. “The income story is exceptionally weak but the odds of a recession are low.”



The panel were broadly agreed, however, on the need for more constructive policy making by the federal government.

Sheard, who is based in the US, noted that the Coalition’s ability to drive through reforms and “budget repair” were increasingly reminiscent of the political gridlock in Washington DC, which meant it would be difficult for presidential frontrunner Hillary Clinton to make policy changes stick if she won in November.

Governments had failed to invest in infrastructure projects during the mining boom because the benefits took longer to see and were therefore less attractive for politicians to pursue, Evans said.

He said the federal government had to try to reduce “bad debt” related to recurrent expenditure but also needed to increase “good debt” to fund capital spending.