New research by global investment management firm PIMCO reveals that Australian mortgage holders are far more sensitive to economic changes than their international counterparts.
This means that dramatic shifts in interest rates and property prices might trigger a flood of property sales due to the higher levels of debt in the low-interest, high-value property market in the Australian market.
The report, “A Model of Australian Household Leverage”, was written by Laura Ryan, who looked at the rate at which Australian households have ‘levered up’ (borrowed more as a proportion of the value of their property) during the current property cycle, comparing it to counterparts in the USA. Her findings stated that Australians’ decision to take on a higher level of debt was driven by two major factors: historically low mortgage rates and the significant growth in house values that the country as a whole has experienced in recent years.
This makes the country’s mortgage holders more sensitive to changes in wealth and the mortgage rate and suggests that if Australians were to start selling off their real estate assets in response to a negative economic shift, it would be at a significant rate. However, according to the economic modelling used to make the report, house prices would need to fall and interest rates rise simultaneously to cause such an event.