If the Australian housing market really is in a bubble, a sudden prick by external factors could instantly result in a market crash.
A report on Markets and Money identified several factors that could trigger such property market crash. First: the risk of higher interest rates.
While interest rates in Australia are at record lows, the ratio of household debt to disposable income has grown rapidly in the last 20 years. Citing figures from the Reserve Bank of Australia, the report said the ratio has almost doubled from 98.6% in March 1997 to 193.7% in June this year.
"The problem is, the increase in house prices has not only multiplied debt but is also causing something called ‘wealth effect’. It basically means that, as households perceive the value of their assets increasing, it makes them feel like they are sitting on a lot of money…so they spend more," the report said, stressing that with such high mortgage debt, the property market would only be sustainable if the interest rates are kept low.
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Slow wage growth is another factor that could spur risk in the market. While many households have had massive property value gains, they are cashed out, with 77% of households claiming they do not have enough cash to cover a quarter of their debts.
"The truth is that low wage growth, paired with higher living costs and even larger mortgages, is taking its toll. And the RBA may be keeping rates on hold, but commercial banks are slowly raising rates. People are spending much of their income on paying off debt," the report explained.
Another threat to the housing market is a rise in unemployment. While the unemployment rate in Australia is currently low, underemployment has reached a record high. According to Digital Finance Analytics, more than 25% of Australian households were suffering from mortgage stress.
Lastly, the overexposure of banks to the market may ultimately lead to a market crash. A report on the Sydney Morning Herald said over 60% of Australia’s banking system loan book is on residential property, translating to $1.51 trillion in mortgages.
The danger lies in interest-only mortgages. Significant portions of Australia's big four portfolios are made up of interest only mortgages: 50% for Westpac, 40% for Commonwealth Bank of Australia, 37% for Australia & New Zealand Banking Group, and 32% of National Australia Bank’s portfolio.