Australia: As Safe As Houses

It’s often difficult for many Australians to consider investment options beyond property. And to be fair, it’s hard to blame them. Australia’s 27-year run (and counting) without a recession driven shock has led to exceptional returns for banking and property investors alike. A generation of uninterrupted house price growth has created the seemingly irrefutable but equally concerning mantra ‘as safe as houses’.

However, the longer the uninterrupted expansion continues the larger the risk within the Australian banking system grows. Since 1991, Australian banks have increased loans to the housing market from $85bn to $1.5tn, representing loan growth of 12.2% p.a. This growth has been much greater than any other type of lending, and as such, housing loans have gone from 20% of all bank loans to 60% today. Australia household debt now sits at over 200% of income, making the country one of the most leveraged in the world. As a point of reference, this metric hit 128% in the US in 2007, prior to the GFC.

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Where we go from here is anyone guess. The point of the above is not to try and predict a housing crash (I’ll leave that to people selling newsletters) but to illustrate how late in the game Australia is. With wage growth currently tracking at around 2% p.a. I believe an ‘optimistic’ scenario would be 3-5 years of flat/minimal growth (in real terms). This is clearly what the RBA is hoping for with Phil Lowe, the Governor of the RBA, openly stating that he’d like to see a “run of years” of little to no growth in household debt.

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