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Are We Heading for a House Price Crash?

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SYDNEY -- Low interest rates could fuel a housing bubble in Australia as consumers and investors look to take advantage of lower mortgage rates, according to Moody's Investor Service.

Several commentators have suggested we are already in a housing bubble in Australia, with The Economist suggesting house prices were already 36% above their fair value in its August update. Credit rating agency Moody's has warned the Reserve Bank of Australia and banking regulators that a housing bubble could leave Australia more vulnerable to a crash.

The Australian Financial Review, The Australian Prudential Regulation Authority, and the RBA have suggested in recent weeks that they are already warning banks about a U.S.-style lending surge, should they not maintain high credit standards. Australia and New Zealand Banking Group (ASX: ANZ.AX), Commonwealth Bank of Australia (ASX: CBA.AX), National Australia Bank (ASX: NAB.AX), and Westpac Banking Corporation (ASX: WBC.AX) are struggling with a low-credit-growth environment. It may be tempting for the banks to relax credit standards to pick up more growth.

Lower interest rates could encourage borrowers to load up on more debt at a time when household debts are still fairly high. A housing crash could see many homeowners over-leveraged and owing more than their houses are worth -- similar to what happened in the U.S. However, unlike the U.S., where banks in many states don't have recourse to people's other assets, Australian banks can pursue borrowers to recover any shortfalls between a home loan and the sale value of the house.

House prices have recently started to rise, and the RBA may have been reluctant to cut rates to avoid fueling more growth in property prices. Unfortunately for the central bank, it's stuck between a rock and a hard place, with exports struggling, commodity prices falling, and signs indicating job weakness. At the same time, other central banks are cutting their interest rates and releasing economic stimulus, putting more upward pressure on our dollar.

Foolish takeaway
We've seen what happened in the U.S. when consumers took on debts they couldn't pay -- and the same situation for European governments. The lesson is to reduce your debts and not be lulled into a false sense of security. Just because housing prices haven't crashed in Australia doesn't mean they can't.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool has a disclosure policy. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, while it's still available. This article contains general investment advice only (under AFSL 400691). Authorized by Bruce Jackson.

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