Housing obsession building more risk

The Reserve Bank of Australia has issued a report on the worrying level of household debt. In the past three decades, debt has risen faster relative to income in Australia than almost any other country in the world. The risk to the economy from rising household debt has long been understood, but the surprise twist in the past year is that the price of houses, the assets that back up the majority of that debt, is now falling.

When house prices were rising at about 10 per cent a year, piling on ever more debt to buy a house or investment property seemed like a no-brainer. Now that one-way bet is not such a sure thing and some people, especially investors, who bought at the peak, could find themselves ‘‘under water’’ if they try to sell out. Clearly the irrational exuberance that pushed up house prices had to end and the past year is part of a natural correction.

Despite that we remain obsessed with housing as a magic store of wealth.

When prices are rising, homeowners feel rich; as prices fall, homeowners feel the weight of their mortgages hang ever heavier around their necks. Australians will have to learn that bidding up the price of each other’s houses is not a long-term formula for wealth.

This could be a turning point in the economy and our culture as the reality dawns that excessive housing debt is not a guaranteed way to make money.