Consequences of a Potential Housing Market Crash in Australia

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Consequences of a Potential Housing Market Crash in Australia

June 12, 2017

 Are you planning to sell your property in Australia fast? There is a lot of talk about a potential housing market crash in Australia. There are many who say that the present growth rate in the property market, where prices are rising at 10 percent every year is unsustainable.

Is that really true? Is Australia at risk of a property bubble? What would happen if there was a severe correction in the housing market?

Experts are unanimous about this. A downturn in the housing market won’t be pretty. A fall of 10 percent in home prices won’t make it easier for anyone to buy property in Australia online, because considering that the average property prices in Australian cities such as Sydney and Melbourne are $1 million, this translates into a saving of $50,000, which is hardly enough.

That is not going to make much of a difference to ordinary Australians. But any fall in the housing market will be immediately bought into by overseas investors, such as wealthy buyers from China, India and Southeast Asia.

A housing market crash may bring home prices down, but it is a huge negative for the economy. It could result in a lot of people defaulting on their home loans.

As economist Saul Eslake explains, "That's the thing that worries the Reserve Bank and other policy makers more ... [the chance we'll start] cutting back on a wide range of spending in ways that would have implications for many other sectors of the Australian economy."  

It could also lead to the loss of jobs, says Philip Soos, author of the book Bubble Economics: "We already have an unemployment rate of 6 per cent, [and] we have the highest underemployment rate on record, that is people who are employed but would like to work more."  

Another issue is that any housing crash would put a lot of strain on the financial system and banks would simply find it impossible to step up the lending activity to boost the economy.

Remember what happened in the US in the immediate aftermath of the subprime mortgage crisis? We could have something similar in Australia. It took the US property market about 8 years to recover from the crisis; it might take Australia a decade or more if such an event was to occur here. 

A housing market crash is negative for the economy and it is also negative for your financial health. It would bring down the value of all the shares in the stock market. That’s because people react to a fall in property prices by selling out and getting out of the stock market altogether.

 Professor Colm Harmon, who teaches Economics at the University of Sydney, talks about what happened in Ireland recently because of the massive fall in home prices: "Banks collapsed — total bailout was required because we hit the perfect storm of falling prices and the GFC. The peak to trough fall in GDP was largest in western economic history, and unemployment went from 4 to 14 per cent in two years."

Something similar could happen in Australia if the property market was to crash. Fortunately, according to experts the chances of a housing market collapse in Australia are slim, as of now.