The latest report of the International Monetary Fund (IMF) on the global economic outlook lists Australia as the second-highest country for ‘housing market risks’ out of 27, next to Canada.
This risk is believed to result in a sharp housing market decline, which might impact the country’s economic growth and financial stability.
Is Australian housing at risk? And, how worried should we be?
Five different measures of housing market risk were used by the IMF to rate countries. Detailed below are some recent insights that provide an overview of the elements of risk.
1. Households' outstanding debt as a percentage of gross disposable income
Data from the RBA showed that Australia housing debt represented around 145.4% (around $2 trillion) of the country’s total disposable household income. Towards the end of 2022, measures to reduce credit growth have already resulted in a slight decline to this ratio, but the numbers are still high.
Housing value growth has outpaced income growth in recent years, leading to more debt for entrants into the housing market. But since housing values have largely increased long-term, outstanding housing debt represented only 17.6% of asset value at the end of last year.
WIth high debt level records, it is extremely necessary that Australian unemployment is contained to support mortgage serviceability.
2. Share of outstanding debt on variable interest rate
Compared with the US and many European countries, Australian mortgage holders pay higher interest rates because the country has a high portion of outstanding housing debt on variable rate terms at around 70% in 2022. Despite increases in cash rates, outstanding mortgages rates only went up to an average of 2% for owner occupier and investor loans.
However, this could be positive for Australia.Governor Lowe reported that the rapid transmission of monetary policy was one of the factors that enabled the RBA to pause a rate hike in April.
3. Share of homeowners with mortgage
There is an increase in the number of Australian homeowners with a mortgage due to longer loan terms and higher housing-debt-to-income ratios. In 2018 and 2020, ABS data shows that the portion of homeowners with a mortgage soared from 32% to 37%.
This suggests that more households experience the direct impact of rising rates through their housing payments, which also affects their household consumption.
Additionally, the same data set shows that 31% of Australians rent, while 30% own a home with a mortgage.
4. Cumulative cash rate changes (March 2020 - September 2022)
Australia currently has the sharpest rate-hiking cycle on record, as a result of the underlying cash rate which dropped to 0.1% and surged to 3.6% as of March this year. In spite of the rapid rate hikes, variable-rate and fixed-rate holders have not yet been fully impacted.
5. House price growth (March 2020 - March 2022)
Within this two-year period, Australian home values spiked to 25.4%, or about 19% when accounting for inflation.
Australian home values rose 25.4%, or about 19% when accounting for inflation, between March 2020 and March 2022. As the IMF reports, housing prices will likely cool more in markets like Australia, where households are more sensitive to rate hikes, and where prices rose during the pandemic.
But there’s already a sharp decline in home values this April 2023, where national home values dropped by -9.1% from their peak in April 2022 and before recovering 0.6% last month. There are still a few months left before the bottom of the market can be called, but the steep price drops to date haven’t resulted in a surge in home loan defaults or forced sales.
Final Thoughts
This IMF report is undoubtedly useful as it emphasizes key vulnerabilities in housing markets that intensifies the associated risks due to increasing unemployment rates. But experts believe that there is room for cautious optimism about the Australian housing market at present.
Australian households have gained strong savings buffers through the low interest rate period, while the labour markets remain extremely tight.
There is a turning point in housing conditions amid low stock levels, rising overseas migration demand, and changing consumer sentiment as the rate-tightening cycle may be coming to an end.
If you’re planning to make property investments this quarter, it’s best to consult with professionals first to make sure you don’t make a costly mistake.
While the IMF report classifies the Australian housing market at ‘high risk’, there surely are effective strategies that new homebuyers or investors like you can do to maximise your resources. Our experts at DDDC Finance are knowledgeable about Australian market conditions, so we can surely help you arrive at the wisest decision.
