Australia's landlord boom may be a greater bad debt risk than corporate defaults
A surge in Australian buy-to-let mortgages that helped to fuel record household borrowing in the country is predicted to be the next driver of bank bad debts, rather than corporate defaults, warns the Reserve Bank of Australia.  Australians, encouraged by a boom in dwelling prices and declining mortgage interest rates, have been investing in real estate, the result being a level of household indebtedness that is now greater than other developed nations.  House prices across Australia have climbed 28% in three years, with Sydney jumping 44%, however, price growth is starting to slow and auction clearance rates have dropped.  It is predicted that house values may fall 7.5% by the end of 2017, which will hit landlords, who account for half of all new home loans.  Regulators warn that higher than average risks to Australia's financial stability revolve around property markets.

The boom in home loans to property landlords that has helped fuel record household borrowing could be the next driver of bank bad debts rather than corporate defaults.

Business-loan losses were behind the biggest bad debt cycles in the past three decades. But a discussion paper from the Reserve Bank says unprecedented borrowing by individuals and signs that the residential property market is coming off the boil mean that, for banks, the next one might be different.

Household debt as a proportion of gross domestic product has risen to a record 134 per cent in Australia. Credit: Dean Osland

Australians' penchant for investing in real estate has been encouraged by a boom in home prices and declining mortgage interest rates that have been driven down by the central bank seeking to ease the nation's shift away from mining. The result is a level of household indebtedness that is now greater than in other developed nations. Unlike in the US and UK, it has also risen to new highs since the 2008 global crisis.