Australia Ranked 2nd Highest in Housing Market Risk, IMF Report Shows

The International Monetary Fund (IMF) has identified five distinct metrics for assessing housing market risk. The article provides an overview of these metrics and examines current information that may contribute to housing market risks in Australia. The article questions whether the Australian housing market is in danger and whether people should be concerned about it.

According to the RBA’s report from June of last year, Australian housing debt has reached record highs, accounting for 145.4% of the nation’s total disposable household income, or around $2 trillion. Although credit growth has slowed since then, the ratio remains high as of the end of 2022. Housing values have increased more rapidly than income, leading to greater debt for those entering the housing market. However, outstanding housing debt amounts to just 17.6% of asset value as of the end of 2022 due to significant long-term growth in housing values. Stable unemployment rates are crucial to support mortgage serviceability despite the high level of debt.

The Reserve Bank of Australia reported in June last year that Australian housing debt had reached a record high, accounting for 145.4% of the nation’s total disposable household income, or around $2 trillion. Although credit growth has slowed since then, the ratio remains high as of the end of 2022. The increase in housing values has outpaced income growth, resulting in greater debt for those entering the housing market. However, outstanding housing debt amounts to just 17.6% of asset value as of the end of 2022 due to significant long-term growth in housing values. Stable unemployment rates are crucial to supporting mortgage serviceability despite the high level of debt.

The proportion of homeowners with a mortgage in Australia has increased from 32% to 37% between 2018 and 2020, likely due to rising housing debt-to-income ratios and longer loan terms. This means more households may be directly affected by rising interest rates, which could impact their consumption. 31% of Australians rent, and 30% own a home without a mortgage.

The article states that Australians are experiencing the sharpest cycle of interest rate hikes on record. The underlying cash rate, which was at emergency lows of 0.1%, has increased rapidly to 3.6% as of March this year. However, the full impact of these rate increases has not yet been passed on to fixed-rate holders or variable-rate holders.

Between March 2020 and March 2022, Australian home values experienced a 25.4% increase, which equates to around a 19% rise when accounting for inflation. However, the International Monetary Fund predicts that housing prices will likely experience a greater cooling effect in markets such as Australia, compared to other countries, due to households being more sensitive to rate hikes and substantial pandemic-related increases in housing prices.

As of April 2023, there has existed a noteworthy drop in home values. National home values have fallen by a record -9.1% from their peak in April 2022, with a 0.6% increase observed in the past month. Although it may be premature to declare the market’s bottom, the considerable price reductions to date have resulted in only limited increases in home loan defaults or forced sales.

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