So does this mean there's nothing to worry about? Of course not. Australia's house price bubble is no different to any other. It's been based on how much credit has been available. And the country's banks have been pumping it out. Home loan debt has increased seven times compared with GDP in the last 20 years.
Home loans now account for 57% of all the advances on Aussie banks' balance sheets. That's an all-time high. And those banks' share prices have risen on the back of this lending boom, too.
But the big problem, says economist Steve Keen, is that the country's housing market has become a giant Ponzi scheme. The last buyers in pay for the profits of those who sell out to them.
"It's great fun while it lasts", say Keen. "But all Ponzi schemes end [because] they aren't making money, but simply shuffling it and growing debt. When new entrants can't be enticed to join the game, the shuffling stops and the scheme collapses under the weight of accumulated debt. There are very good odds that as this Ponzi scheme collapses and house prices fall, bank shares will go down with them."
Aussie lenders could then find they don't have enough capital after all. Raising extra would hit their shares further. For anyone who's invested in European and American banks, that sounds very familiar.
Why does this matter for investors in Australia? Because the financial sector accounts for around a third of the stock market. If the banks get hit hard, that will hurt the overall index too. So it's time to be careful about putting money in, say, an Australian fund.
