Australians who think that our residential market is as safe as houses will be taken aback by this warning from Oxford Economics.
The research firm claims Australia is among the four riskiest housing markets in the world when measured against some risk factors, including home valuations and debt, as reported by the Australian Financial Review.
Our housing market is arguably the single biggest threat to our economy and a meaningful price correction will hurt the share prices of a wide range of stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
Australia, Sweden, Canada and Hong Kong have been identified as the highest risk markets and they all have similar characteristics such as a prolonged housing boom, high debt levels, and a significant proportion of mortgagees on floating rate loans.
Oxford Economics pointed out that on a housing valuation index where the long-term average is 100, Australia comes in at 160, Sweden at 165, Canada at 173 and Hong Kong at 203.
History has shown that there is a 60% chance of prices falling in the next five years for markets with a value of 125 or more.
Home prices in Sydney and Melbourne are already falling and this is without any material increase in mortgage rates.
When rates rise in a more pronounced fashion, and that’s a question of “when” and not “if”, Australia could be in trouble as Oxford Economics noted that 82% of mortgagees are on variable rate loans.
It may not take much to put many households under financial stress given that Aussie households are the most, if not one of the most, leveraged.
Add in poor wages growth into the mix and you can see how things can fall like a house of cards. The latest jobs data highlights this risk. While the headline figure was better than expected, underutilisation remains elevated and economists believe it will be a while yet before we get any meaningful wage growth here.
Stocks directly linked to the housing market, such as apartment builder Mirvac Group (ASX: MGR) and residential and retail property developer Stockland Corporation Ltd (ASX: SGP) will be among the first to feel the impact of a housing crash.
But not all companies linked to the residential building sector will be hit as hard. Those that are leveraged to the infrastructure building boom will fare much better.
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Motley Fool contributor Brendon Lau owns shares of Boral Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.