If you grew up in Australia then you’d probably agree that the idea of owning your own home is practically a birthright in this country. The “Great Australian Dream” has been drilled into our very psyches from an early age, where young children start planning their fantasy abodes before they even have the capacity to understand what the reality of home ownership has become.
The Australian property market has seen unprecedented growth and outstanding performance for the last 40 years now. So it’s no surprise that economists and financial experts alike have found it easy to laugh off the idea of a catastrophic downturn in the property market value. After all, naysayers love to speculate on doom and gloom at any chance they get, right? Just so they can put a negative spin on a positive story and sensationalise with scare tactics… right?
Well, as time wears on, and the facts come to light, Australia’s housing bubble may not be as invincible as it once seemed. More specifically, we might be looking at the beginning of the end as we speak. The inevitable burst.
So what’s the deal? Well, we’ve all heard the saying “what goes up must come down”, right? Well the property market is no different. It may have seemed as though the rise in housing prices were never going to die down, but key events have started taking effect that may indeed be the gradual accumulation of the final straws that break the camel’s back.
The Market of Irresistibility
For a very long time now, we’ve been reassured time and time again that housing prices will continue to keep going up. That’s just what we’ve come to expect in this day and age, and for good reason – since for about 30-40 years now, that’s basically all they’ve done!
So it’s only natural that people want to jump on board. The housing market has become so seductive that Australians are going above and beyond what they can even afford, barely scraping by just so they can afford to make their mortgage repayments. It’s hard to resist the idea of investing in an asset that is only going to increase in value, and after all, how else will they be able to attain the Great Australian Dream?
Ok so that’s obviously not a good thing but will that really be enough to burst the housing bubble? Not on its own, but that’s not the only issue we’re facing…
The Big Four Banks of Australia currently have around $1.8 trillion of outstanding mortgage debt. Yes, I said trillion. And just in case you’re wondering… that’s a lot, even in banking terms.
Essentially, this means that $1.8 trillion of the bank’s assets solely rely upon these mortgages – this is a whopping ? of the entirety of their combined capital. And if that doesn’t sound crazy enough, you might be interested to know that a huge portion of these mortgages have been taken out by investors. Over the past few years, around 50% of all home loans were issued out to investors. And just in case you’re wondering… that’s a lot.
So what’s the big deal? Well, all of these numbers point to one big problem: with the banks relying so heavily on the home loans, it makes them extremely vulnerable to the housing bubble and everything that comes with it. So in short, all of these factors are inextricably linked – cue the domino effect…
Since the Royal Commission caught wind of the dodgy dealings rife within the banking industry, Australia’s Big Four banks have been severely scolded and put in the naughty corner while they scramble to get their act together. The scandals committed by these banks revolving around the approval of home loans have been downright disgraceful. Bribery, fraud, deliberately inaccurate approval standards, you name it. And now, due to this flagrant disregard for the Australian public, they’ve had to deal with the consequences. Good! Right?…
Well, because of this crackdown, the banks had to pay up big time, which has now resulted in their current decision to increase interest rates to makeup for their “losses”. A raise in interest rates, alongside their enforced tightening of lending standards, will then make it even harder for Australians to be approved for loans, and end up stretching those who are already struggling to breaking point.
So let’s summarise, with the illegitimate and unethical lending by the banks that have allowed individuals to borrow more money than they should be able to in order to pay off a house that they can barely afford to live in, this will inevitably end up meaning that home loan approvals will take a severe plunge before long. Given these facts, it’s now been estimated that in the next couple of years we may very well see a decrease in home loans by as much as 30-40%. The truth being, if we experience anything even remotely close to this then we can be certain that the property market will be in serious trouble.
So at the end of the day, the current structure is just not sustainable. We can’t keep going the way we’re going without any serious ramifications. The housing market is so over-stretched that it can’t continue to expand any further before it snaps back and hits the whole of Australia square in the face. Changes have slowly begun moving in this very direction, and before long, if some serious changes aren’t made and everyone would rather keep their blinders on, we’re going to be in a whole lot of trouble that won’t be easy to get out of. So let’s keep our eyes and ears open, remain vigilant, and see where the road leads us for now.