House prices in Australia’s major cities have been ballooning for over a decade. It used to be that homes selling in excess of $1 million were solely from the luxury end of the market. But in Melbourne and Sydney, sales in excess of $1 million are commonplace these days.
But in the last year, you’ve probably noticed that the market is starting to turn. Property prices in our metropolitan hubs are starting to fall.
If things continue on this track, we could be setting ourselves up for a potential housing collapse.
Here’s how it could unravel.
Years of low interest rates in Australia have succeeded in inflating home prices in many of Australia’s capital cities. But at some point interest rates must normalise.
We’re seeing interest rates rise overseas, and as Australia’s economy gathers steam, the Reserve Bank may be forced to put on the brakes and start to increase interest rates also. After years of these low rates, the property market could be in for a shock. Particularly if housing prices continue to weaken…
Australia’s housing bubble
Higher interest rates lead to higher monthly repayments. As most Australian's mortgages become more unaffordable, households will be forced to limit their spending, particularly on discretionary items.
This in turn affects the wider economy. As more and more of the weekly wage gets lost into paying the mortgage, there’s less money left over to fund other areas of the economy.
Business starts to slow and unemployment starts to rise. Then the cast is set and property will start to fall.
The real problem will be when the value of the home falls below the level of the loan outstanding. Which as we’ve been seeing recently, is a likely possibility.
In that event, the banks will be in a lot of trouble.
And we may be in for a repeat of the catastrophic crash in 2008.