Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 106

Impact of house price falls on other assets

For many years, The Economist and other commentators have claimed there is a 'housing bubble' in Australia. The property sector and Australia’s banks say there’s not. Given the implications for property and for investors in the banks that are themselves heavily exposed to property, it is an important debate. We briefly lay out both sides of the argument, and then show the impact on other asset classes should there be a correction.

Case against the housing bubble: supply not keeping up with demand

Chart 1: House prices, Australia 1987-2014, compared to changes in supply and demand

Several compounding factors can be blamed for the housing price increases:

  • Net migration has been more than double the long-term average since 2005
  • Foreign investment has also doubled
  • Annual increase in population due to births less deaths shifted to new records from 2005
  • Supply inflexibility as dwelling commencements have not increased since the 1980s.

Case for the housing bubble: fundamentals out of whack

Chart 2: Price/ rent index, various countries, 1975-2014
(higher the ratio, the more expensive the capital values compared to rental income)

The case against relies more on the idea that Australian housing should comply with some global benchmarks such as those shown above. Regardless of which of these fundamental ratios are used, Australia comes across as one of the most expensive housing markets in the world:

  • Rental yield vs long-term averages – Only Britain and Canada are further from long-term averages than Australia. China is far below Australia on this measure.
  • Inflation-adjusted price increases – ‘Real’ prices in Australia are up 2.8 times since 1975, compared to the US at 1.3 times.

Of course no-one knows whether residential property is due for a strong correction. All you can do is be prepared and not over-exposed to the risk of a bubble, while not over-reacting, putting all your cash in the bank and potentially reducing your income. The key is to ensure you have the means to ride out any downturns without being forced to sell.

What impact would such a correction have on other asset prices?

Australians are heavily invested in residential property and so the impact of a property crash is obvious for those assets. But the impact on other investments is just as important to understand. Australia’s banks have around 61% of their loan books exposed to residential property, and banks now represent 32% of the ASX 300 and are the top four holdings in the average SMSF portfolio.

Table 1: Shock to Australia’s home values: potential impact on other asset values from a material (eg 20%) fall in home prices

Views on the direction of Australia’s property market are mixed. Fundamentals should point to a fall in prices in the medium term, but Australia’s unique geography and high immigration constantly defy economic fundamentals. In the face of such uncertainty, it is prudent to stay the course but ensure that you are prepared for the unlikely scenario of, say, a 20% fall in real house prices and that this won’t have a material impact on your lifestyle.

 

Craig Swanger is Head of Markets at FIIG Securities Limited. This article is for general education purposes and does not address the specific circumstances of any individual.

 

RELATED ARTICLES

What's left unsaid in Australia's housing bubble

Valuations still stretched in Australia’s housing market

Noel's share winners and loser plus budget reality check

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Retirement

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

Shares

Boom, bubble or alarm?

After a stellar 2025 to date for equities, warning signs - from speculative froth to stretched valuations - suggest the market’s calm may be masking deeper fragilities. Strategic rebalancing feels increasingly timely.

Property

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Economy

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Shares

Is the iPhone nearing its Blackberry moment?

Blackberry clung on to the superiority of keyboards at the beginning of the touchscreen era and paid the ultimate price. Could the rise of agentic AI and a new generation of hardware do something similar to Apple?

Fixed interest

Things may finally be turning for the bond market

The bond market is quietly regaining strength. As rate cuts loom and economic growth moderates, high-quality credit and global fixed income present renewed opportunities for investors seeking income and stability. 

Shares

The wisdom of buying absurdly expensive stocks (or not!)

Companies trading at over 10x revenue now account for over 20% of the MSCI World index, levels not seen since the dotcom bubble. Can these shares create lasting value, or are they destined to unravel?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.