Many Australians share the belief that ‘house prices will only go up in value’. And while this has been the case for the last three decades, it may be about to change.
After five years of surging house prices in Australia, the total market value has grown to $7.3 trillion.
Not even the US or UK markets achieved these heights relative to their economies during their peak a decade ago. Which, keep in mind, resulted in a market-wide crash.
Rising Aussie house prices finally stalled in the closing months of 2017. Every state capital in Australia except Hobart saw price falls in December 2017.
We can expect to see this continue throughout 2018, if building approvals are anything to go by. Data released last week revealed that the number of homes approved has surged, particularly apartments.
Falling prices on a collision course with increasing supply. It’s no secret that this is a recipe for disaster.
What can we expect for 2018 Australian housing market?
Markets are supposed to coordinate supply and demand.
Which admittedly, can be a hard job for developers when the supply takes such a long time to complete.
It can be difficult for developers to adjust to a changing market. If they have a couple hundred apartments ready to sell, but the market has cooled, this presents a problem.
Developers don’t want to sell for less than planned, especially if the project was funded by debt. Although, accepting a small loss could be better than holding on and hoping the market improves.
What we can expect to see, is builders racing to get their developments finished before everyone else. Those who can finish earliest, can hope to sell before the market spirals.
If developers rush to sell off stock into a cooling market, it could result in full-blown panic.
There is one thing we can learn from the US housing crash. Many analysts failed to see it coming.
Admittedly, we are not the same as the US in 2008. Australian homeowners aren’t able to simply walk away if they no longer can afford their mortgage, which was a possibility in the US. Australian banks would instead go after a guarantor or default borrower’s income or assets.
Despite that, the risk of a housing crash to Australia could be far greater.
Aussie economy dependent on the housing market
Our economy is dependent on the housing market. Our bank stocks are huge, and a significant driver of our share market. And many Australians have mortgages, or are depending for their retirement on their house’s value.
Australians have placed all our eggs in the housing industry.
ABC news reported that Australia’s household debt to income ratio is ‘one of the highest in the world’. Australian Bureau of Statistics data revealed that total household debt is 199.7% of disposable income, equivalent to upwards of $2.466 trillion.
Residential real estate represents a much larger part of our economy than the US in 2008.
There is no way of knowing that this will actually happen, or how big it could be. But it would be mad to be certain that the Australian housing market can’t crash. And if it does, the consequences could be disastrous for our entire economy.
If you are interested in finding out more about the risk of an Australian recession, and how you could protect your investments during one, download your free report ‘The Aussie Recession Survival Guide’ here.
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