Australia’s New Debt Problem and the Real Estate Market

Australia’s New Debt Problem and the Real Estate Market

 Should you sell your property in Australia fast, keeping in mind the fears of a property bubble, which so many experts have hinted at? While fears of a housing bubble have receded to an extent, there are renewed worries over a possible housing debt crisis in the country.

RBA, Australia’s central bank has spoken out extensively about the massive household debt in Australia, even while keeping the real estate rates unchanged.

RBA said in its report that there was a “need to balance the risks associated with high household debt in a low-inflation environment”. The central bank warned, “wage and price inflation had not increased by as much as expected in other economies around the world that are already close to full employment, which raised the possibility that low inflation in Australia might persist longer than forecast.”

RBA added that the employment situation looked good, as “forecasts for the labor market were starting from a stronger position. Employment had increased in every state since the start of 2017, including solid growth in the mining-exposed states.”

Interestingly, the RBA warnings come at a time Global ratings agency Moody's has downgraded the top four banks and many other financial institutions in Australia over a looming housing crisis.

Moody's explain that they did not expect a sharp downturn in housing but were worried about the high levels of debt: "Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest-only and investment loans are all indicators of rising risks."  

Moody’s added that they were worried about "the rising prevalence of interest-only and investment loans" which indicated the rising risks. "The resilience of household balance sheets and, consequently, bank portfolios to a serious economic downturn has not been tested at these levels of private-sector indebtedness," Moody’s said.

Moody's made a major rerating of Australia's economic profile from "very strong" to "strong", because of their concerns over housing sector, also because of Australia’s debt-to-GDP level.

Moody’s report comes immediately after another major rating agency, S&P Global downgraded all financial institutions in Australia as there was an "increased risk of a sharp correction in property prices".

S&P said "economic imbalances in Australia have increased due to strong growth in private sector debt and residential property prices in the past four years".

The ratings agency said that there was a real possibility of a housing correction in Australia with "residential home loans securing two-thirds of banks' lending assets. The impact of such a scenario on financial institutions would be amplified by the Australian economy's external weaknesses, in particular its persistent current account deficits and high level of external debt".

However, there is still a huge demand for properties in Sydney and Melbourne and even in Tier-2 cities such as Brisbane, Perth, Hobart and Adelaide. There seems to be no dearth of foreign investors who want to buy property in Australia online. This is an interesting time to be in Australia for sure.

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