Five reasons the IMF classifies Australian housing as relatively ‘high risk’

Key takeaways

The International Monetary Fund has ranked Australia as the second-highest country for housing market risk, behind Canada. A sharp housing market decline could have implications for economic growth and financial stability.

Australian housing debt is high, but because housing values have grown so much long term, outstanding housing debt represents just 17.6% of the asset value at the end of 2022. Australia's high share of housing debt on variable rate terms means that mortgage holders feel the sting of higher interest rates more rapidly, but this could be a positive for Australia.

Australian mortgage holders have so far dealt well with rising rates, with the portion of the mortgage market associated with late repayments rising but remaining low.

As housing-debt-to-income ratios have risen and loan terms have gradually become longer over time, more Australian households own a home with a mortgage. This could mean more households feel the direct impact of rising rates.

Australians are experiencing the sharpest rate-hiking cycle on record, with rapid rate increases not yet fully passed on to fixed-rate holders. Australian home values rose 25.4% from March 2020 to March 2022 but fell -9.1% from their peak in April 2022, before recovering 0.6% last month.

The Australian housing market is turning a corner amid low stock levels, rising demand from overseas migration, and consumer sentiment shifting higher as we approach the end of the rate-tightening cycle.

The International Monetary Fund has released its latest publications on the global economic outlook, ranking Australia as the second-highest country for ‘housing market risk’ out of 27 countries, behind Canada.

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

So, is Australian housing at risk and how worried should we be?

The IMF scored countries on five different measures of housing market risk.

These are outlined below, with more recent insights that provide some perspective on the elements of risk at play.

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

According to the RBA, Australian housing debt represented around 145.4%, of the country’s total disposable household income, around $2 trillion.

While slowing credit growth has since resulted in a slight decline in this ratio to the end of 2022, it’s still hovering around record highs.

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% of the asset value at the end of 2022.

Debt levels are undoubtedly high, so it is important that Australian unemployment remains contained to support mortgage serviceability.

2. The share of housing debt on variable interest rates

Australia has a high portion of outstanding housing debt on variable rate terms (around 70% at the close of 2022).

This means that, unlike the US and many European counties, mortgage holders feel the sting of higher interest rates more rapidly.

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.

However, this could arguably be a positive for Australia.

The fast transmission of monetary policy was reportedly one of the factors that empowered the RBA to pause the rate-hiking cycle in April, according to a recent address from Governor Lowe.

Australian mortgage holders 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% lower than the five-year average).

APRA lending data for December showed the portion of the mortgage market associated with late repayments was rising, but remains low, at around 1%.

3. The share of homeowners 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 is comprised of owners with a mortgage.

ABS data shows that between 2018 and 2020, the portion of homeowners with a mortgage jumped from 32% to 37%.

This means 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.

The same figures show 31% of Australians rent, while 30% of households own a home without a mortgage.

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

Australians are experiencing the sharpest rate-hiking cycle on record, as the underlying cash rate went from emergency lows of 0.1% to 3.6% as of March this year.

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%, or about 19% 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 as of April 2023, a sharp decline in home values has already occurred.

National home values declined a record -9.1% from their peak in April 2022, before recovering 0.6% 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.

Final note...

Ultimately, IMF reporting is important.

It highlights key vulnerabilities in housing markets that exacerbate the risk associated with a surge in unemployment.

But for now, there is room for cautious optimism about the Australian housing market.

Many households have accrued strong savings buffers through the low-interest rate period, and labour markets remain extremely tight.

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.

About Eliza Owen Eliza is head Of Residential Research Australia for Corelogic and a respected property market commentator. Eliza holds a first class honours degree in economics from the University of Sydney