Australia, nicknamed the "lucky country", has been thriving for a generation. The economy hasn't shrunk since the early 1990s. Late last year it officially notched up the longest stretch of growth in modern history, says The Economist: 104 quarters, eclipsing the Netherlands' 103.
Australia looked due for a nasty downturn during the global crisis, but its overheated housing market and relatively high consumer debt load were offset by a booming China, which was enjoying a government-induced lending spree and needed Australia's metals exports. When the commodities boom cooled, "the diverse economies of Victoria and New South Wales picked up the slack". The decline in the Australian dollar fuelled agricultural exports and tourism, while the further-education sector successfully enticed foreign tourists.
But now we may finally have reached the end of the road. The housing bubble has been hissing air: one gauge of house price inflation slipped from an annual rate of 11.4% in May 2017 to 0.8% in March. An index covering Sydney and Melbourne found that prices declined by 0.3% year-on-year across the combined state capitals last month the first annual fall since 2012. In some parts of Sydney, prices have jumped by 50% since 2011. The median Sydney house price is above A$1m.
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Crisis postponed, not averted
The pin that appears to have burst the bubble is regulators' insistence on tougher lending standards. The share of interest-only mortgages banks may issue has been capped, for instance. Expect nationwide annual house-price growth to slip below zero in the next few months, says Capital Economics. More homes are currently being listed than sold. Demand is likely to fall further as interest rates look set to rise from record lows next year. Consumers are tapped out, with household debt now at an eye-watering 190% of disposable income. With debt still on the rise, lending standards won't be loosened any time soon.
"A nervous Australian banking system is watching the market closely," as Peter Grant notes in The Wall Street Journal. There are echoes of the US subprime crisis in the Australian banking sector's lending practices. They are suspected of offering customers "liar's loans" for large multiples of earnings with no proof of income, says Katherine Griffiths in The Times.
Selling could increase rapidly if the economy slows. And without house prices seemingly perpetually climbing, indebted consumers' confidence may dwindle. All the ingredients for a housing-led slowdown appear in place. Australia's high exposure to the US and China, and hence to a trade war between the two powers, is also denting confidence in local assets. Australia's luck seems to be running out.
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