Australian household debt is at frankly insane levels, leaving the country with one of the highest levels of household debt in the world. With home prices forecast to rise through 2025, alarm bells are sounding on the durability of a housing market that many believe is running on fumes. The Australian housing price bubble has inundated the market for 15 or so years. Now, it’s getting even worse as over 40 percent of all new loans are being issued to property investors.
The banking industry regulator, led by John Lonsdale, has taken aim at what many consider the most significant threat to the economy—the overheating property market. We’re told this housing boom is backed by a gold-plated $3.3 trillion in mortgages. In turn, financial regulators are getting more worried about those consequences on people’s households and the wider economy.
Rising Household Debt and Its Implications
Australian household debt has soared to new historic levels, trumpeting warning bells for potential financial ruin. Housing developers are taking advantage of tax incentives intended to stimulate the housing market. This exacerbates the volume of debt by increasing the total amount of debt. These incentives have pushed an enormous savings into home investments, instead of improving housing accessibility for all Australians.
More recently, the marked shift towards lending to property investors has been a major factor driving up the boom in household debt. As of now, more than 40 percent of all new loans are going to these speculators. This trend is obviously cause for concern and casts doubt on the sustainability of the market. This trend indicates that only those who are born into households that already own property will be able to secure home ownership for themselves. This predatory practice creates a pernicious cycle that would roil the nation’s growing wealth gap.
The Australia’s wealth chasm is more than just dollars and cents. Its substance therefore represents a huge danger for how Australians might understand their own identities and forge their own futures. When we make property the main source of community and individual wealth, it creates vast inequities. Those shut out of the housing market will continue to be increasingly marginalized.
Housing Prices Continue to Soar
As you may have heard, national home prices are going up. This troubling trend bodes ill not only for prospective new homeowners, but for the current economy. Once again, folks are concerned about an impending crash in the housing market. In spite of these risks, mortgage default rates are hitting all-time lows, hovering around 1.1 percent. This newly found stability has created confidence in the banks, which has allowed them to add to their already strong profits during the hot market.
The Australian banking system has shown its resilience in the worst economic times. It came through the harshest inflationary environment in half a century and the most aggressive cycle of interest rate increases in history. There’s one institution whose $600B+ housing sector investments are all direct loans to residential borrowers. This begs disbelief and concern about the long-term sustainability of such concentrated risk.
The continuing housing boom is helping swell the bottom line of Australian banks, too. Alongside this, financial regulators including ASIC, APRA and the Reserve Bank are monitoring threats to financial stability with a watchful eye. Their emphasis on the bubbling property market is a welcome sign that they’re aware of the systemic risk that continued property price inflation will create.
The Role of Financial Regulators
In recognition of these trends, economic regulators have dramatically increased their oversight of the real estate market. The Australian Prudential Regulation Authority (APRA) and other regulatory bodies are assessing the risks associated with high levels of household debt and rising property prices. They understand that an overheated property market is the greatest danger to their households. This state of affairs jeopardizes our nation’s long-term economic prosperity.
John Lonsdale’s leadership at APRA has been instrumental in taking these concerns and addressing them head-on. Under his direction, APRA has worked to implement measures aimed at stabilizing the housing market while ensuring that banks maintain prudent lending practices. The real challenge is to strike a balance between economic growth and smart, strong regulation that prevents the acquisition of even more dangerous household debt.
The Australian government’s tax incentives for property investment have fueled much of this growth, but they highlight a critical issue: these incentives often benefit only a select few. Property prices are through the roof, pushing the dream of homeownership out of reach for millions of Australians. This inflationary explosion is exacerbating the racial wealth gap and the housing crisis.
