Australians love to buy property, and while that’s providing an economic windfall to many after years of strong price growth, particularly in the nation’s southeastern capitals, its high concentration of housing wealth may actually prove to be a curse should a housing market crisis occur.
That’s the view of Moody’s Investor Services who says that high household debt levels, and a lack of alternate financial assets that could be easily liquidated if required, makes the Australian economy more vulnerable to a housing market crisis than most.
“Household leverage relative to households’ liquid financial assets excluding superannuation reserves is particularly high in Australia, at a level comparable to that observed in Ireland on the eve of its housing market crisis,” says Moody’s.
“This suggests that, in the event of a negative income shock, the scope for Australian households to draw down parts of their financial assets to maintain debt service and overall spending is more limited than elsewhere.”
As this chart from Moody’s reveals, the ration of household debt as a percentage of liquid assets held by households is well above the levels seen in Ireland prior to it’s housing market crash nearly a decade ago.
Including superannuation savings, Moody’s say that Australia’s ratio comes down to levels currently comparable to those in Canada, another country whose housing market has come under increased scrutiny given rampant house price growth and increased household indebtedness.
However, even with vast superannuation savings, the group still thinks that the Australian economy is vulnerable.
“The illiquid nature of these assets limits the buffer role,” it says.
“Although superannuation clauses allow drawdowns in case of heightened financial pressure, these provisions are meant to cater to particularly severe cases.
“Moreover, having drawn on their superannuation funds, Australian households would likely attempt to rebuild them as soon as possible, which would weigh on consumption.”
Such a scenario would hardly be ideal, particularly if large numbers of Australians are forced to dip into their super in order to pay down debt, a situation that could amplify losses in financial markets given the nation’s concentration in riskier assets such as shares.
Along with likely dragging on household consumption, Moody’s says that many of the outcomes seen in the global financial crisis in nation’s such as Ireland, Spain and the United States would also be repeated.
“A broad-based housing market correction, whether that correction is the initial negative shock or, more likely, triggered by other economic or financial shocks, generally results in lower growth,” it says.
“That weighs on revenues, while also leading to higher government spending to offset the impact of the shock, both of which weaken public finances. Governments may also have to provide financial support to the banking sector if it comes under acute pressure.”
While that sounds ominous for Australia, particularly at a time when concerns over increased leverage in the housing market have intensified, contributing to strong house price gains, both growth in household debt and real house prices over the past three years still remains significantly below the levels seen in Ireland and Spain prior to their housing market crises.
They’re shown in red, and occurred after significant increases in household debt, house price growth and a sudden deceleration in population growth.
However, while that might suggest that Australia is in the clear, it must be remembered that this is a national average, and not focused on specific markets.
Looking at where the United States sat just before its housing crisis formed, it’s easy to envisage that Sydney and Melbourne would sit in a similar position now given recent rampant house price growth.
And with a significantly larger household debt-to-disposable income ratio.
A significant house price decline in these markets would be felt across the country given their sheer population size, and importance, to the broader Australian economy.
Perhaps that’s why policymakers from the RBA have been warning about increased financial stability risks, and why the banking regulator, APRA, has taken steps to curb interest-only mortgage debt.
No one wants to test the theory of Australia being “different” should an unexpected economic shock take place.
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