Australia's Banks May be on Verge of Housing Bust; Homes Too Expensive for Most Australians

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By Reissa Su | July 15, 2013 4:16 PM EST

Banks in Australia have the highest concentration of residential mortgages than any other type of institution in the world, making them vulnerable to a possible house price correction according to the analysis of a leading credit market economist. 

Moody's Analytics managing director Tony Hughes says that house prices in Australia were overvalued which could pose a major concentration risk for banks.  The high exposure to residential mortgage represents a valid risk for banks and the Australian economy. 

The high exposure of Aussie banks to home loans causes investors to raise concerns.  Local analysts downplayed the threat of a housing collapse but Hughes said the experience of a financial crisis caused by the U.S. subprime mortgage is proof that Australia should not remain complacent. 

The property downturn in the U.S brought the country's banks to their knees.  Hughes said house prices were modestly but not excessively overvalued.  The recent experience has shown house prices can drop significantly causing a serious financial meltdown in the banking industry.

The chances of Australia experiencing a housing bust are quite high according to many international analysts.  Hughes said only a bold economist in a 10-year coma can declare that an Australian housing collapse was impossible.  When housing prices in Australia are compared globally, investors have cause for worry. 

Housing affordability in Australia

Since houses in Australia are overvalued, many Australians consider housing affordability an issue.  This is true especially for voters as housing ranks ahead of border security, broadband and education among the issues government must focus on. 

According to a study conducted by Auspol, 84 per cent of Australians believe housing affordability is more important than other issues. Apparently, Australians are frustrated by the lack of affordable housing but their anger has yet to be directed to political leaders running the country. 

Kevin Rudd has yet to tackle a national housing policy since his return as Prime Minister of Australia.  Meanwhile, Tony Abbott has previously said that home ownership is a state government matter. 

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