Australia’s current housing crisis, or more correctly, price boom in the property market has been well documented over the last 5 years and it may finally have come to an end.
There is some speculation to this, however, and many expects are reluctant to say the housing crisis is over is because it may in fact have just begin with the potential repercussions to be realised within the next decade.
We currently have a nation whose housing market is valued at $7.3 trillion – substantially higher than what the UK and US achieved at their peaks over a decade ago.
This puts Australia in a rather dangerous position and one that may well see a greater fall than the subprime mortgage crisis in the US leading up to and during the Global Financial Crisis of 2007-08.
Australia’s obsession with property, as a result of an ageing economy, low interest rates and banks willingness for home lending, has skyrocketed over the last decade. The influence of demand on price due to this obsession has been most notably seen over the last 5 years.
The encouraged investment, low-risk borrowing and occasional tax breaks initially seemed harmless and beneficial for the economy but we are now seeing the consequences of being too accommodative for too long.
Consumers and Debt
Many Australian households are now experiencing debt that is twice the size of China’s, on our way to becoming the second-most indebted nation, on a household basis, in the world.
This is a major concern for the Reserve Bank of Australia as households haven’t seen the pay rises required to accommodate the debt. This, therefore, means that it is becoming more and more difficult for the RBA to increase interest rates.
Earlier this month, UBS economists declared “Australia’s world-record housing boom is officially over” and that the “cooling may be happening more quickly than even we expected”.
A rapid slowdown in the boom will see the outlined debt realised in a more real state. Without the growth to incur positive returns on property investments, the Australian economy will too, slow down and with the RBA continually reluctant to tighten interest rates it is becoming an increasingly real problem.
The Banks
The banks have played a key role in the housing boom and will likely be the victims if the predicted crisis is to eventuate.
Heavy lending and the changing view as houses have become more of a financial commodity has seen borrowers rush into a frenzy of mortgage-related products which in turn does make banks very profitable but it also leaves them very exposed.
Whilst they may have the sufficient buffers to deal with a downturn, banks may believe it is difficult to effectively value any collateral in the failing market as investors look to strengthen their property portfolios.
With the housing boom plateauing and the accumulated debt of Australian households now an issue, the collective relief for many may well only be short lived as the real crisis begins.
The RBA is confident that banking regulations have put brakes on the lending curb and that the financial system is positioned to withstand any shocks. However, it is the consumers that place uncertainty around the confidence.