The 1st Warning of Australia’s Impending Housing Apocalypse

NAB may have just given us the first real warning of an impending housing apocalypse in Australia.

The bank revealed that home loan applications plunged 15 percent during the June quarter. On its own, that figure might be dismissed as a quarterly fluctuation or a problem specific to NAB. But it is not happening on its own.

Equifax recorded a 14 percent annual decline in mortgage inquiries in June, reversing the almost 11 percent growth in January. Sydney and Melbourne property prices have fallen by close to 5 percent this year, auction clearance rates have slumped, and the Reserve Bank admits the housing market has slowed more than it expected.

The pin is edging towards the balloon.

The most immediate trigger has probably been the Albanese Government’s changes to negative gearing and, to a lesser extent, capital gains tax. Investors who relied upon negative gearing to make an otherwise loss-making investment worthwhile are reconsidering their plans.

Those changes have landed alongside higher interest rates, weaker confidence, tighter lending conditions, and the slow drip-feed of state laws giving tenants more rights while stripping control from landlords.

The combined message to residential property investors is fairly simple: put your money somewhere else.

But this is much bigger than the policies of one government or a single bad quarter in mortgage applications. Australia’s housing market has existed in a fantasy-land bubble for decades.

The numbers are astonishing. Over the past 30 years, Sydney property prices have increased by more than 730 percent. The median price rose from approximately $215,000, or less than six times the median household income, to about $1.8 million, more than 13 times the median household income.

That is not an ordinary increase in the value of a useful asset. It is a wholesale detachment of property prices from the incomes of the people expected to buy those properties.

When median-income families cannot buy even poor, run-down homes without surrendering an obscene proportion of their income to a bank for most of their working lives, the problem is not with the families. The problem is with the market.

This is not economics. This is madness.

The prices may have been based on false economics, but most Australians eventually accepted them as real. Banks lent against them. Governments taxed them. Councils rated them. Investors borrowed against their supposed equity to buy another property, then borrowed against that property to buy the next one.

A false economy gradually converged with the real economy until it became almost impossible to separate the two.

Economist Jonathan Tepper described this as “Ponzi financing” back in 2016. Buyers made money while prices continued rising. Rising valuations created paper equity, which produced deposits for additional properties, which in turn generated even more debt and pushed prices even higher.

Tepper’s predicted crash did not occur at the time. Government intervention, cheap money, and relentless population growth kept the machine running. Rather than proving him wrong, Australia spent another decade making the eventual consequences worse.

The total value of Australia’s 11.5 million homes has now reached an extraordinary $12.8 trillion, up 87 percent over this decade alone.

That is why falling house prices are not merely a problem for estate agents and property investors. Housing has become the foundation upon which much of the Australian economy has been built.

Nowhere is that more apparent than in the banking system.

Residential mortgages account for nearly two-thirds of Australian bank lending. The big four live off home loans, with the Commonwealth Bank holding the country’s largest mortgage book.

Those loans are considered safe because they are secured against property. But how safe is a million-dollar loan when the property securing it is no longer worth anything close to a million dollars?

APRA tested the banking system against a scenario involving 10 percent unemployment and a 40 percent fall in housing prices. The participating banks remained above their minimum capital and liquidity requirements.

That sounds reassuring until you remember that a 40 percent fall in Sydney’s $1.8 million median would still leave the median at approximately $1.08 million. That would hardly restore widespread affordability.

A 50 percent fall would reduce it to $900,000. Even then, Sydney housing would remain beyond the reasonable reach of many Australian families. A 60 percent fall would bring it to approximately $720,000.

I am not saying a 60 percent collapse is imminent. But in a market this detached from incomes, it is no longer unthinkable, particularly if the Australian public gets its way and migration is severely reduced.

The consequences for recent borrowers would be catastrophic.

Someone who borrowed 80 percent of the current $1.8 million median would owe approximately $1.44 million. If the property fell 50 percent, it would be worth $900,000, leaving a $540,000 gulf between the property and the debt. After a 60 percent fall, the house would be worth $720,000 against that same $1.44 million loan.

Australians cannot simply hand back the keys and walk away, as borrowers can in some parts of the United States. Our mortgages are effectively full-recourse loans.

But people buried beneath staggering debts, holding assets worth only a fraction of what they paid, can go bankrupt.

The Australian Financial Security Authority confirms what then happens. The bank repossesses the property and sells it. If the sale does not cover the mortgage, the remaining shortfall becomes unsecured debt. That shortfall can be included in the borrower’s bankruptcy, after which the bank can no longer pursue the borrower. Most such shortfalls are extinguished when the bankruptcy ends.

One family doing that is a tragedy. Tens of thousands doing it becomes a banking crisis.

Falling prices create negative equity. Economic turmoil causes repayment failures. Banks repossess homes and dump them into an already collapsing market, driving prices lower. The sales crystallise enormous mortgage shortfalls. Bankruptcies leave the banks holding those losses. Their capital is eroded, and public confidence evaporates.

That is how a major bank could collapse.

Australia has avoided that reckoning because governments have spent three decades propping up the housing market and, through it, the banks.

Whenever property has weakened, another rescue has appeared. First Home Owner grants, stamp-duty concessions, government deposit guarantees, HomeBuilder, and low-deposit schemes have all been sold as assistance for homebuyers, builders, tradies, and hardware stores.

Nonsense.

Whatever their publicly stated purpose, these schemes pumped additional money into housing, sustained inflated prices, and protected banks' mortgage books. It is well established that assistance to buyers can be absorbed into higher prices when housing supply cannot respond quickly.

During the pandemic, the Reserve Bank went even further, providing banks with $188 billion in low-cost funding through its Term Funding Facility. During the global financial crisis, the government guaranteed deposits and wholesale bank funding. NAB and Westpac even accessed emergency loans from the US Federal Reserve.

The banks have been protected repeatedly because governments know that if banks suffer pain, they will pass it on rather than absorb it.

Mass migration has been another form of property-market life support. Bringing hundreds of thousands of additional people into the country each year maintained demand, drove down rental vacancies, and prevented the market from going into cardiac arrest.

Even analysts who reject the prospect of a housing crash admit that high migration is one of the main forces underpinning prices.

That floor may not remain in place forever. Net overseas migration was still above 300,000 in 2025, but 55 percent of Australians now say migration is too high. Another poll found 64 percent wanted immigration reduced, including 43 percent demanding a big cut.

If Australians force governments to severely reduce migration, one of the main mechanisms sustaining housing demand will disappear.

Then there is the political power of the banks themselves.

Trust me, I spent 12 years in federal politics and witnessed what amounted to a turnstile staffing arrangement. Political advisers would finish in Canberra and suddenly reappear as lobbyists for banks and financial institutions. Banking and finance figures would move in the other direction, joining ministerial offices and influencing government policy.

It was not confined to anonymous staffers.

Former Queensland premier Anna Bligh became chief executive of the Australian Banking Association. Josh Frydenberg worked at Deutsche Bank before entering Parliament and joined Goldman Sachs after leaving it. Malcolm Turnbull was a merchant banker before briefly becoming Prime Minister.

The banks may not literally own our governments, but they have achieved deep regulatory, political, and economic control through lobbying, personal networks, and the revolving door. Their tentacles reach into almost every corner of the Australian economy.

That's why the response to the Banking Royal Commission was inadequate relative to what was uncovered and the scale of the misconduct of the banks involved. It should have surprised nobody.

The media has also played its part in maintaining the fantasy that is the Australian housing market.

Australian newspapers and television networks thrive when property goes bananas. Real estate sections, auction reports, renovation programs, and breathless stories about record suburban sales have spent years conditioning Australians to believe that endlessly rising prices are natural, desirable, and inevitable.

News Corporation controls REA Group, the company behind realestate.com.au. Until last year, Nine Entertainment held a controlling 60.1 percent stake in Domain.

Nine’s decision to cash out looks, to me, like a suspiciously well-timed retreat.

Politics propped up the bubble. Propaganda sold it to the public. The banks made fortunes from it.

Now the first cracks are appearing.

The downturn has already wiped more than $60 billion from the market value of Australian bank shares. The NSW Government has cut its stamp-duty forecasts by $5.3 billion over four years. Estate agents, removalists, renovators, tradespeople, and retailers are beginning to feel the slowdown.

This is what happens when a nation bases so much of its prosperity on houses being repeatedly sold to one another at ever-higher prices.

If the bubble seriously bursts, the carnage will be widespread. Mum-and-dad investors could lose their life savings. Recent homeowners could be left with debts many times larger than the value of their homes. Superannuation balances would be hit through exposure to property, the wider share market, and, of course, the banks.

And what of the banks themselves?

I would bet my bottom dollar that when a major bank faces collapse, the government will rush to protect it before protecting ruined homeowners or small investors.

They have a track record of protecting banks, not ordinary folk. For example, the government assures depositors that an ordinary deposit cannot be bailed in. Yet Parliament declined the opportunity to include an unequivocal prohibition in the legislation, while the taxpayer-backed Financial Claims Scheme stops at $250,000 per account holder per banking license.

If the worst happens, governments will tell us that rescuing a bank is necessary to save the economy. They will say taxpayer support protects depositors, businesses, jobs, and financial stability.

It will be the same sales pitch we have heard for decades.

The truth is that successive governments helped create this false housing economy. They kept it afloat with subsidies, cheap funding, mass migration, and political intervention. They allowed the banks to become so dependent upon mortgages that a genuine return to housing affordability could threaten the financial system itself.

NAB’s 15 percent fall in home loan applications does not mean the apocalypse has arrived.

But it may be the first unmistakable warning that the long-delayed reckoning is finally approaching.

“This is truly Ponzi financing, where home buyers only make money if their houses keep rising in value. Paying interest only and revaluing property allows for a Ponzi dynamic. As prices rise in a Ponzi fashion, more equity allows for more deposits. This will reverse viciously when prices fall.”
– Jonathan Tepper, economist and founder of Variant Perception, on Australia’s housing market, 2016.