Is Australia’s real estate bubble about to burst?

Whenever a financial adviser speaks publicly about the huge rise in housing costs in Australia, they warn of the imminent bursting of the bubble. According to most experts, the debt ratio per household is well above sustainability. This scenario can also be seen in communities where businesses are closing and trade is declining significantly. While credit cards are stretched to the limit, most are struggling to get food on the table.

The mortgage holders of a large percentage of homes are so indebted that it is only a matter of time before the bubble bursts. Home prices have risen so much that anyone looking to move into a home has to contract well beyond their ability to pay off the debt.

Some call this the perfect storm because people made such arrangements when they were employed in good jobs, their futures were secure, and interest rates were low. This situation is now changing rapidly as many are now unemployed, reduced incomes have also struck (for one reason or another) and wages are stagnant.

The government has just been pushing too hard, and by allowing things like negative gearing, it’s pushed up home prices as investors flock to buy what they can. As a result, rents have also skyrocketed and more people have been left homeless because they are unable to pay landlords’ demands.

When the rapid change of Prime Minister brought the country into uncharted territory in the last 5 years, this also meant an inconsistency in the housing industry. While mortgage rates are low and attractive to buyers, lending rates have skyrocketed. This had resulted in a snowball of debt and left a large number of them unable to pay.

The outlook is bleak and it is compared to the US before the meltdown that triggered the global financial crisis.

The biggest companies in Australia are the big four banks and they make super profits. They have the peace of mind that if the buyer defaults, they can confiscate the assets. The question of how worthwhile they are given what is now inevitable. If the housing market crashes, who knows how far it will go?

Governments tend to prop up banks in such a crisis and one wonders if the strategy used to deal with such an event is not their fault. While politicians have access to the best minds in business, they don’t seem to be doing a very good job. My sympathy goes out to those who will be devastated by what must now be inevitable.