By 1989, the average UK house price had surged to 6.2 times average earnings from about four times just before the second world war. House prices had swelled because a 1947 law regulating building hampered supply and the financial deregulation of the 1980s created a lending frenzy amid a view that house prices, especially in London where the world flocked, could never fall.

They more than plunged. UK house prices dived 25 per cent in nominal terms (so more in real terms) from mid-1989 to 1993 after policymakers boosted interest rates to cool an overheating economy. A recession ensured whereby the jobless rate jumped from 6.9 cent in mid-1990 to 10.7 per cent in 1992. About two million households fell into ‘negative equity’ – where their mortgages exceeded the value of their homes. From 1990 to 1995, lenders repossessed about 345,000 homes that they then sold, bankrupting many homeowners.

This is one context in which to place the comments on 5 September by Reserve Bank of Australia governor Michele Bullock when she warned that 5 per cent of owner-occupiers with variable-rate home loans were in ‘a particularly challenging situation’ due to higher mortgage rates. Among ‘painful adjustments’ forced on ‘really struggling households’, Bullock warned, ‘some may ultimately make the difficult decision to sell their homes’.

The remarks were a surprise because policymakers atop fractional-reserve banking systems usually act to quell concerns lest panic about the financial instability becomes self-fulfilling. Bullock’s comments can be interpreted as a warning about what many think impossible; that Australia’s housing market could crash. What’s undeniable is that Australia meets, or is poised to fulfil, the three preconditions behind every housing bust.

The first condition is that housing be overvalued. An asset class is considered excessively expensive if emotion and momentum divorce prices from fundamentals. For property, the economic fundamentals governing price are rental yields (rental income divided by the value of the property) and affordability. Australian housing is at record bubbly levels on these measures.

The doubling since 2011 in the median Australian house price to $973,300 ($1.22 million for New South Wales) as of June this year has squashed rental yields to around record lows.

The latest Domian Rental Report shows Sydney’s average rental housing yield was 3 per cent in December 2023, after rent increases boosted it from a record low of 2.6 per cent 12 months prior. Note that this yield return doesn’t factor in agent fees, council rates, maintenance expenses, periodic vacancy and other costs and circumstances that reduce owner returns. Actual yields are probably closer to zero or negative.

The affordability statistics are more dire. The value of the national median dwelling has soared to a record 8.5 times median annual household income, from about 4.5 times in 2001, according to the latest (2022) ANZ CoreLogic Housing Affordability Report. Housing in Australia is essentially unaffordable for the masses, frothed up by past record low interest rates, excessive borrowing, early inheritance, building restrictions and foreign buyers including wealthy immigrants.

The second prerequisite for a housing crash is interest rates increasing enough to stress borrowers. This is where big mortgages and the fact that most mortgages are on variable interest rates hurt.

Australian households are among the most indebted in the advanced world, owing debt equal to 116 per cent of GDP. The average mortgage is about $600,000. The size of this debt makes borrowers vulnerable to interest rates that are still low by historic standards. Many have warned that today’s mortgage rates near 7 per cent are as devastating as those approaching 20 per cent were in the early 1990s when consumer debt was about 50 per cent of GDP.

Most mortgaged borrowers are on floating rates because the uncompetitive Australian banking industry pushes the interest rate risk onto borrowers by only offering fixed-rate mortgages for short terms. These people are bearing the RBA’s 13 increases in the cash rate since 2022.

The Real Estate Institute of Australia’s latest Housing Affordability Report shows mortgage repayments have swelled to a unprecedented burden for households, since it began tracking the measure in 1996. The average annual loan repayment now accounts for a record 48.1 per cent of median family income.

Such pressures are already undermining prices. CoreLogic on 11 September reported housing values fell in almost 30 per cent of Australian suburbs over the June quarter.

Australia’s meeting of the first two prerequisites for a housing crash is why the International Monetary Fund in 2023 warned Australia’s housing market was the riskiest in the world after Canada’s. But a crash needs a trigger.

The third stipulation for a housing bust is a recession that, via higher unemployment or lost income, plunges too many households into debt distress. Australia’s economy has shrunk on a per capita basis over the past six quarters. But immigration has kept the economy expanding – just – while the jobless rate, at 4.2 per cent in July, is around full-employment levels, even if that’s up from a post-pandemic low of 3.5 per cent in mid-2023. But a recession is inevitable – they are ingrained within capitalism. And the next downturn is likely to be deep. Consumers are overindebted. Policymakers have limited stimulus left. The world is struggling. The country is impeding exporters. Financial markets are frothy and liable to plunge.

Thus the jobless rate could climb to levels that spark enough forced selling to savage the property market. If the housing market were to go kaboom, the wider economic and social damage could be huge enough to turn any recession into the worst slump since the 1930s.

Mortgage rates, to be clear, are expected to drop. But nowhere near the pandemic’s historic lows of less than 2 per cent. Policymakers will try everything to smother a rise in the jobless rate (including raising the RBA’s inflation target). They might contain any drop in housing prices, but only until their limited stimulus runs out. Households will try to hang onto their homes. But no job, no hope. Australia’s banks have no bad debts. But that’s a benefit of rising house prices. If people default and prices dive, bad debts will soar and banks could wobble.

Hopes for a steady housing market and stable Australian economy essentially hinge on permanent full employment. No chance, sorry. To their surprise, Australians might discover, as the British did more than 30 years ago, that housing prices can plunge. Even in the sought-after suburbs.