When was the last housing market crash in Australia?

Highlights

• The record-low interest rates in Australia have prompted widespread borrowing, causing a large uptick in housing demand.

• Australia has had a long history of a property price boom due to a favourable environment for borrowers.

• The Australian housing market saw a crash in 2011, which is still fresh in the minds of authorities.

The Australian housing market has been subject to many ups and downs in the recent past. The record-low interest rates have brewed an environment of widespread borrowing, causing a large uptick in housing demand. However, the current boom in prices has its roots tied to Australia’s tax breaks, cheap money, and the existing prosperity in the country.

With time the large boom in prices has surfaced again during the pandemic. While many believe the record-low interest rates are to blame, the Australian property market has been gradually rising over the last two decades. The central bank’s monetary easing in 2020 only cemented what the market had long feared the onset of a housing price bubble that has just now begun to deflate. However, as the rate of price rise become slower, a more worrying concern is that the housing market might crash.

Usually, housing bubbles are succeeded by the breaking down of the housing and banking sectors. Nations such as Japan, the US, Spain, and the Netherlands, have been a testament to this fact. Most importantly, the catalyst behind the popping of a bubble is elevated inflation and higher interest rates. While interest rates are yet to be increased in Australia, the sharp uptick in inflation has left experts worried.

Australia has earned the reputation of being one of the most expensive places to own a house. The sector’s dynamic history is evident in the many bubbles it has endured. Here is a look at what happened the last time a housing bubble burst in the country.

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Australian housing market crash 2011

As per a report from the Reserve Bank of Australia (RBA), housing prices increased by more than 6% per year between 1995 and 2005. This was followed by an average annual rise of almost 15% from 2001 to 2003. Thus, Australia’s housing price boom dates to the early 2000s, which laid the foundation for its eventual bust in 2011.

The housing price surge contributed to a higher number of mortgages being taken out during that period, eerily similar to the present-day scenario. Essentially, mortgage lending became the prime focus of lending in banks’ balance sheets during the early 2000s. Real estate loans formed a major part of Tier 1 capital, which is the core measure of a bank’s financial strength. Thus, banks relied heavily on these mortgage loans as a source of income and financial backing.

However, even before housing prices went downhill, signs of a bubble burst were visible across banks’ balance sheets. The first and most important sign was the sharp rise in the proportion of impaired assets in the Tier 1 category. Impaired assets have a lower market value than the value listed on the owner’s balance sheets.

This meant that banks’ highest-ranking assets were virtually losing their value. However, all these events came crashing down on the housing market as the number of non-performing loans increased. Debt-laden Australians could not finance their mortgage payments, leading to a shocking number of loans being unpaid. Eventually, the housing market lost its value, and prices started to fall steeply.

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Will Australian real estate crash?

Australian mortgage borrowing is once again at worrying levels, which is enough to convince some that a bubble burst might be underway. Additionally, as higher interest rates are eventually implemented in most parts of the world to reduce borrowing, those with a mortgage are at risk of facing increased debt pressure.

Image description: Increasing interest rates would lead to higher debt-pressure.

With wages growth taking a slower-than-desired uptick, it is possible that many Aussies would not be able to finance their mortgage repayments. However, the robust employment data has factored in some positivity into the property market outlook. Experts suggest that a strong labour market could provide some stability to the economy, preventing the housing market from a collapse.

As prices take a slower route uphill, the housing market may survive a deflationary spell in real estate prices. Additionally, mortgage lending has lowered since 2020 due to the many regulatory actions taken by the authorities. However, only time will tell whether the sector will withstand this test.

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