Australia’s Great Housing Collapse
A Cautionary Tale of Intervention and Consequences.
Ever wondered what would happen if Australia’s housing bubble popped? I dug into this question to explore:
What might trigger the bubble to burst?
How the government might respond.
What would be left of the economy afterward.
Sometimes it’s fun to wildly speculate!
It became clear pretty quickly: Australia’s economy is one big inflationary shock away from disaster. We’ve built so much around this housing machine, and at some point, gravity always wins.
Why This Matters: The Housing Bubble
Australia’s housing market has been a big deal for years—it’s like the engine of the country’s economy (now that China isn't buying as much of our ore as before). But what happens when that engine starts sputtering? With sky-high property prices and household debt levels through the roof, the housing market could be headed for one massive crash. And this isn’t just about houses; it’s about how a collapse could ripple through every corner of Australia’s economy and society.
Setting the Stage: A Market on the Edge
The Australian housing market has been balancing on shaky financial ground for years. Here’s what’s going on:
Crazy Price-to-Income Ratios: Houses in Sydney and Melbourne cost way more than what most people earn. (The median price of a home in Sydney is around 13.8 times the average income)
Household Debt: Australians owe more money relative to their income than almost anyone else in the world. (Our household debt to GDP ratio is around 115% - worse than Canada and New Zealand - other countries with inflated housing markets)
Geopolitical Issues: Tensions with China, our biggest trading partner, could hurt key export industries.
Interest Rates: Even small rate hikes can hit hard when so many people are leveraged to the max.
Throw in a global slowdown and rising inflation, and you’ve got the perfect recipe for disaster. Hey, wait a minute - that is exactly what we have now!
The Collapse, Year by Year
Year 1: The Shock Hits
To kick things off we would need a massive global inflation shock combined with a global downturn. Even better if China is caught in the middle of all of this.
This could come about from:
war in the pacific - if Taiwan gets invaded
Trump going on a tariff blitzkrieg
An unforeseen energy shock (see OPEC oil crisis of the 70's though this is less likely now that the USA pumps out so much of that stuff)
Global interest rates shoot up, and the RBA follows suit. Mortgage repayments skyrocket, leaving households struggling to keep up. On top of that, tensions with China cause a drop in demand for Aussie exports, weakening the AUD and making imports more expensive. House prices start to slide, which sends the market into panic mode. Developers abandon projects, and construction layoffs pile up, hitting the economy hard.
We are kind of half way there right now to be honest. An inflation shock now would make us cactus.
Year 2: Government Tries to Save the Day
The government steps in with a bunch of measures to stop the bleeding:
Bigger First-Home Buyer Grants: They double the cash incentives.
Investor Tax Breaks: Negative gearing gets expanded.
Mortgage Holidays: Struggling households can pause their repayments.
Bank Bailouts: Big cash injections keep the banks afloat.
RBA’s QE: They start buying bonds and capping mortgage rates to keep things moving.
At first, these efforts seem to work—prices stabilise, and confidence starts to return. But underneath, the cracks are growing.
The government intervening is a no brainer from a political perspective. The entire economy runs on property. See Matt Barrie below:
But... it only makes things worse.
Year 3: Things Start Falling Apart
The government’s efforts backfire. Here’s what happens:
Speculation Returns: Investors jump back into the market, driving prices up artificially.
Debt Spirals: Households take on even more debt, which only makes the system more fragile. How else are Gen Z gonna get onto the property ladder?
Public Debt Balloons: The cost of all these bailouts and grants pushes national debt to 150% of GDP.
Meanwhile, the AUD drops further, inflation keeps climbing, and inequality gets worse. Renters are squeezed, protests erupt, and younger Australians demand change.
Keep an eye on the AUD. Thats where all the action is. If the AUD tanks - the cost of imports rises (including petrol) pushing inflation up further.
Year 4: The Crash
The structural problems can’t stay hidden anymore. Loan deferrals expire, and defaults surge. House prices plummet another 40%, dragging banks to the brink of insolvency. Unemployment hits 12%, GDP shrinks by 8%, and Australia enters stagflation. International investors lose faith, and financial conditions tighten even more.
The Fallout: What’s Left
By Year 5, the damage is everywhere:
House Prices Tank: Down 50% from their peak, leaving many homeowners owing more than their properties are worth.
Public Cuts: Infrastructure projects are slashed as austerity measures kick in.
Inequality Deepens: Older property owners hold onto their gains, while younger generations struggle to recover. The boomers screw us over again!
Zooming Out: The Geopolitical and Economic Mess
Australia’s reliance on China only makes things worse. As export revenues drop, the AUD weakens further, making everything from fuel to food more expensive. The housing collapse reveals just how risky it is to have an economy so tied to real estate and commodities.
If you’re thinking long-term, this is a wake-up call to diversify. Investing in overseas ETFs, foreign government bonds, or real estate in stable markets like the U.S. could protect your portfolio from these kinds of local risks. Don't bet the house on property... oh wait.
The banks are protected from this crap, we will just end up bankrupt with our house and belongings sold then have debt we have to pay off at the end of the day to even own anything ever again. The people who don't manage to pay it off will just get bailed out by the banks insurance that we pay on our mortgages. The bank is protected and investors will just buy up the profitable market with continued property price growth unless we finally start cutting them off from the market.