Construction of housing in China is a key driver of demand for Australia's iron ore.
Construction of housing in China is a key driver of demand for Australia's iron ore.
A resources expert has forecast the iron ore price will continue to tumble as the Chinese economy begins "unravelling", causing significant issues for Australia.
Speaking at a conference on Thursday, the federal government's former top resources forecaster Quentin Grafton said the iron ore price was unlikely to recover quickly, leading to a painful downturn in the Australian economy in 2015.
"This isn't about doom and gloom, it's about looking at the risk and numbers. It's a clear and present danger," Mr Grafton said.
He said the Reserve Bank of Australia should prepare for a difficult ride as the overpriced property market and high dollar created a challenging economic environment as coal and iron ore prices dropped.

Home grown problem

Mr Grafton's comments join an increasingly vociferous choir of concern about the Chinese economy, with investor fears stoked by a Chinese residential property market that is experiencing its worst slump on record.
The average price of new homes has been falling in China for months, with the rate of decline accelerating from June (0.5 per cent) to July (0.8 per cent), sending tremors through the economy. It dropped another 0.6 per cent in August, bringing the average to $US1737 per square metre.
Property market issues are of critical concern for the Chinese economy and global investment community, as the property sector is a key economic driver that contributed 15 per cent of China's 2013 gross domestic product.
In a recent newsletter about the Chinese economy, Westpac analysts said real estate was the heart of domestic confidence issues and predicted a grim future for ongoing growth.
"Housing construction activity is vital to employment levels and land values are vital to the functioning of large swathes of the credit system," Westpac's Phat Dragon explained.
"In the early moments of a policy induced housing correction, the economy tends to be able to maintain its composure for a number of months, occasionally even quarters, before the ultimate capitulation."

Government help

Global market research group Nomura said the Chinese government intervention would be needed to prevent a decline in economic growth.
Nomura tracks a range of Chinese economic indicators, such as credit activity, each month. In June, 71 per cent of these were positive or "hot" but this dropped rapidly to 52 per cent in July.
A report released by Citi this week also said targeted government policies would be needed but warned significant intervention was unlikely.
"The central government is not in a rush to introduce nationwide policy to interrupt the market correction. The correction may last for three years, forcing capacity reduction," the report said.
Short of a sharp collapse in property investment, Citi said it was unlikely the government would loosen its overall credit policy.
"So far, targeted easing has been used, but broad-based loosening (such as RRR and rate cuts) may be needed late this year or next year," the report said.

Iron bond

China's property market woes are directly linked to the Australian economy as Chinese residential property construction is a leading consumer of iron ore, which accounts for $1 of every $5 of Australian exports.
The dropping demand and oversupply issues have caused the iron ore price to drop to a five year low. It is currently hovering around $US84.38 a tonne.
The next historic low would take a significant slide to $76 a tonne, a rate not seen since September 2009.