When was the last real estate crash in Australia?

The Australian property market has seen many ups and downs lately. Historically low interest rates have created a widespread borrowing environment, causing a surge in demand for housing. However, the current price spike has its roots in Australia’s tax breaks, cheap money and the country’s existing prosperity.

Over time, the big price boom resurfaced during the pandemic. While many believe that historically low interest rates are to blame, Australia’s property market has steadily grown over the past two decades. The central bank’s monetary easing in 2020 only cemented what the market had long feared, namely the emergence of a property price bubble that has only just begun to deflate. However, as the rate of price increases slows, a more worrying concern is that the housing market could collapse.

Usually, housing bubbles are followed by the collapse of the housing and banking sectors. Countries like Japan, the United States, Spain and the Netherlands bear witness to this. More importantly, the catalyst behind the bursting of a bubble is high inflation and higher interest rates. While interest rates have yet to rise in Australia, the sharp rise in inflation has experts worried.

Australia has earned a reputation for being one of the most expensive places to own a home. The sector’s dynamic history is evident in the many bubbles it has endured. Here’s a look at what happened the last time a housing bubble burst in the country.

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2011 Australian property market crash

According to a report by the Reserve Bank of Australia (RBA), house prices increased by more than 6% per year between 1995 and 2005. This was followed by an average annual increase of almost 15% from 2001 to 2003. Thus, the Australian housing price boom dates back to the early 2000s, which laid the groundwork for its eventual collapse in 2011.

Soaring real estate prices helped to increase the number of mortgages taken out during this period, eerily similar to the current scenario. Essentially, mortgages became the primary lending focus on banks’ balance sheets in the early 2000s. Home loans made up a significant portion of Tier 1 capital, which is a bank’s primary measure of financial strength. . Thus, banks have relied heavily on these mortgages as a source of income and financial support.

However, even before property prices fell, signs of a bubble bursting were visible on banks’ balance sheets. The first and most important sign was the sharp increase in the proportion of impaired assets in the Tier 1 category. Impaired assets have a market value that is lower than the value recorded on the owner’s balance sheets.

This meant that the banks’ top-rated assets practically lost value. However, all of these events came crashing down on the housing market as the number of non-performing loans increased. Debt-ridden Australians could not fund their mortgage payments, leading to a shocking number of defaulted loans. Eventually, the housing market lost value and prices began to fall sharply.

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Will Australian real estate collapse?

Australian mortgage borrowing is again at worrying levels, which is enough to convince some that a bubble could burst. Additionally, as higher interest rates are eventually implemented in most parts of the world to reduce borrowing, those with mortgages are likely to face increased debt pressure.

Image Description: Rising interest rates would lead to increased debt pressure.

With wage growth slower than expected, many Australians may not be able to fund their mortgage repayments. However, strong employment data factored in some positivity in the housing market outlook. Experts suggest that a strong labor market could bring some stability to the economy, preventing the housing market from collapsing.

As prices rise more slowly, the housing market could survive a period of house price deflation. In addition, mortgage lending has declined since 2020 due to numerous regulatory measures taken by authorities. However, only time will tell if the sector will stand this test.

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