Is the Australian housing market truly at ‘high risk’?

“Some of the outcomes associated with this risk include a sharp housing market decline, which could have implications for economic growth and financial stability,” she said. 

While the expert acknowledged the report’s importance as it highlighted the “key vulnerabilities in housing markets”, she argued there is “room for cautious optimism”. 

“Many households have accrued strong savings buffers through the low interest rate period, and labour markets remain extremely tight,” Ms Owen said.

“Housing market conditions are turning a corner amid low stock levels, rising demand from overseas migration, and consumer sentiment shifting higher as we approach what may be the end of the rate-tightening cycle,” she added. 

With the IMF scoring countries using five different measures of housing market risk, the expert provided additional recent insights that provide additional perspective on the “elements of risk at play” in the market. 

1. Outstanding housing debt to household income in June last year. 

In its report, the IMF highlighted that one country’s biggest risk factor is due to its high levels of debt compared to income. 

Data from the Reserve Bank (RBA) showed Australian housing debt is roughly 145.4 per cent of the country’s total disposable household income of the country’s total disposable household income, around $2 trillion. 

According to Ms Owen, entrants to the housing market have taken on more debt to buy homes over time because housing value growth has outpaced income growth.

“But the flip side of this is that because housing values have grown so much long term, outstanding housing debt represented just 17.6 per cent of the asset value at the end of 2022,” she explained. 

Acknowledging that debt levels are “undoubtedly high”, Ms Owen said it’s important that Australian unemployment remains contained to underpin mortgage serviceability.

2. The share of housing debt on variable interest rates. 

Another risk factor highlighted by the report is the high portion of outstanding housing debt on variable rate terms in the country, which stood at around 70 per cent at the end of 2022. 

Ms Owen explained that in contrast to the US and several European nations, Australian mortgage holders experienced the impact of rising interest rates more quickly. 

“Amid cash rate rises, outstanding mortgage rates in Australia have increased an average of just over 200 basis points for owner-occupier and investor loans,” she stated. 

But Ms Owen argued that this could be “a positive for Australia”, citing a recent address from RBA’s governor, Philip Lowe, which revealed the fast transmission of monetary policy was reportedly one of the factors that empowered the RBA to pause the rate-hiking cycle in April. 

She also highlighted that despite the rapid rate rise cycle, Australian borrowers have, so far, “dealt well with rising rates”. 

“CoreLogic data shows little indication of an increase in distressed properties hitting the market, as the flow of new listings volumes remains subdued nationally (trending -14.8 per cent lower than the five-year average). 

“APRA lending data to December showed the portion of the mortgage market associated with late repayments was rising, but remains low, at around 1 per cent,” she stated. 

3. The share of home owners with a mortgage

Another factor that contributed to the IMF labelling the country’s housing market is the marked increase in the portion of home owners with a mortgage. 

“As housing debt-to-income ratios have risen, and loan terms have gradually become longer over time, more home ownership in Australia consists of owners with a mortgage,” Ms Owen explained. 

Data from the Australian Bureau of Statistics showed that between 2018 and 2020, the portion of home owners with a mortgage jumped from 32 per cent to 37 per cent. 

Notably, the same figures showed that 31 per cent of Australians rent, while 30 percent of households own a home without a mortgage.

According to the expert, the figures indicate more households may be feeling the direct impact of rising rates through their housing payments, and rate rises could have a stronger impact on household consumption. 

4. Cumulative cash rate changes from March 2020 to September 2022

Australians are experiencing the sharpest rate-hiking cycle on record, with the underlying cash rate rising from record lows of 0.1 per cent, to 3.6 per cent as of March 2023. 

Despite the rapid increase in rates, Ms Owen highlighted that rapid rate increases have not yet fully been passed on to fixed-rate holders, or even variable-rate holders.

5. Real house price growth between March 2020 to March 2022

Australian home values rose 25.4 per cent, or about 19 per cent when accounting for inflation, between March 2020 and March 2022.

According to the IMF, housing prices will likely cool more in markets like Australia, relative to other countries, where households are more sensitive to rate hikes, and housing prices rose substantially during the pandemic.

But Ms Owen countered the IMF finding, pointing out that a sharp decline in home values has already occurred.

National home values declined a record 9.1 per cent from their peak in April 2022, before recovering 0.6 per cent last month.

“While it may still be too early to call the bottom of the market, the steep price falls to date have seen limited increases in home loan defaults or forced sales,” she stated.

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