Will the house of cards come crumbling down !!

Updated: May 26, 2020

The number one thing I hear all the time.

The Australian property market will crash just like the American property market has several times already. To understand why the Australian market will react differently we must understand the fundamentals.

What many people don't understand is.

Australia has APRA (Australian Prudential Regulation Authority. Which is an independent statutory authority that supervises institutions across banking, insurance and superannuation and promotes financial system stability in Australia. Essentially the banks are governed by APRA who tells them what they can and cant do.

APRA has recently forced all banks to assess their clients at 7% and more recently 5%. So every single person that has a mortgage at the moment, has had to prove that they can service their loans and 5% and 7%. So while debt levels are high in some areas, Everyone at the moment has proved that they do have buffers should interest rates increase. (which they will not be increasing anytime in the near future)

This leads me to my second point. NINJA loans. (No income, No job, No asset loans). Pretty Self explanatory. In America people were given loans, even if they had no income, no asset, and no jobs and the loans were not 80% or 90% loans, People were given 100% and 110% loans. Obviously in Australia we do not have this because we have the lenders regulated by APRA.

This leads me to my last point. In America, you can hand back your keys if you cannot make your repayments, and there are no repercussions. The lender will take the asset, Sell it off and you can walk away. In Australia, it has a range of implications. From having an impact on your credit rating, it can have legal implications, you could potentially lose your other assets and it has many long term ramifications, which is why the default rate in Australia sits at 1% while in America it sit at 5% and has at times been as high as 10%.

The next time some tries to compare the global housing markets to the Australian housing market, please remember this. There is a reason why. Out of the last 4 recessions, 2 of them we saw house prices increase, and the other 2 recessions we saw a 5%-10% drop in some areas, Followed by 10+% growth in the following years.

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