Increasing household debt can bring about possible recession in Australia: OECD

By @shauryaarya1 on
Household
Properties can be seen along the coastline in the Sydney suburb of Clovelly, Australia, July 19, 2015. Reuters/David Gray

The Organisation for Economic Cooperation Development (OECD) has warned that expanding household debt could bring about a recession. The findings come in the organisation’s first review of the Australian economy since August 2014.

According to the report, house prices could see a downfall rather than ease. This could lead to an escalation in mortgage defaults and cause a shutdown in household consumption.  The organisation said there is a 20 percent chance of a recession. Among other factors that could bring about a financial slump include China slowdown, downfall of iron ore and coal prices and lack of business investment.

The national economy grew by 1.1 percent in the last three months of 2016, as highlighted by the figures released this week. However, the growth came on the heels of a contraction of 0.5 percent. The GDP enhanced by 2.4 percent through the year.

The economic growth was largely aided by an impressive performance of 15 out of 20 industries. Mining, agriculture, forestry and fishing and professional scientific and technical services contributed to the GDP growth. The nominal GDP, which is evaluated at current market prices, upped by 3 percent. The OECD forecasts the Australian economy to enhance by 2.6 percent in 2017 – aided by, among other things, large exports and strengthened housing sector.

Nevertheless, the housing market, along with massive debt loads taken on by home buyers in Sydney and Melbourne, has been labelled as one of the country’s largest threats, OECD notes. “Macrofinancial indicators underline the threat from the housing market, with house prices and related indicators pointing to continued vulnerability,” the organisation said. “The market may not ease gently but develop into a rout on prices and demand with significant macroeconomic implications.”

House prices in Sydney have grown by 19.1 percent in the last 12 months. Meanwhile, Melbourne has witnessed a rise of 14 percent over the same period. Last month, home prices in Sydney saw an annual price growth of 18.4 percent, marking it as the highest recorded level since 2002. Moreover, according to research firm CreLogic, they have increased 75 percent in less than five years.

Rising prices and debt can pose as a significant risk to the national economy.  As much as half of Australia’s total debt, which has seen an increase of more than 250 percent of GDP, can be attributed to households, OECD notes. In 1995, households amounted to a third of the national economy.