What could be the downsides of a housing market rebound?

Amidst the renewed optimism in the housing market due to the expectations of recovery, some experts believe a rebound in housing prices would make matters worse for Australia’s high debt level.

Economists at Moody’s Analytics fear that a market rebound could worsen the debt situation in the country, given that Australian households are amongst the most leveraged in developed countries. In fact, Australian household’s mortgages, personal loans, and credit card dues account for more than 120% of the country’s gross domestic product.

Australia’s household debt level is higher than in the United States, Canada, New Zealand, Japan, Germany, and the United Kingdom.

While the likely series of rate cuts by the Reserve Bank of Australia (RBA) would boost the housing market, it could push the household leverage-to-GDP ratio climb, Moody’s economists said in a study.

“This is an undesirable position to be in, particularly given the questions around the sustainability of the potentially rising debt load,” the study said.

During the post-global financial crisis, household debt levels as a proportion of the economy fell in many of the developed countries. On the other hand, Australia witnessed its debt level balloon due to the surge in house prices, particularly in Sydney and Melbourne where values rose by 68% and 54% between 2012 and 2017.

Despite the recent downturn, housing values in Sydney remain roughly 60% higher than they were in 2012.

“The housing correction that took hold in 2018 was a long time coming after a strong run-up in values in the more densely populated markets, including Sydney and Melbourne,” the study said. “The correction has delivered important improvements in affordability, but not materially.”

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