So it looks like Australia's banking sector could be at risk here if its household debt (housing debt) is mispriced. But, according to the Commonwealth Bank of Australia, other metrics show that the household debt boom is under control. Here's a July 2013 note I found from the CBA (w/charts).
Household debt trends
- Australian households have housing debt levels that are high by international standards.
- But income and asset characteristics of relevant households suggest that they can service the debt comfortably.
- Housing loans make up the largest component of household debt while housing is generally the largest asset.
- In the past few years Australian households have become more cautious about committing to higher housing debt and continue to save slightly more than 10% of their income, the highest level since the 1980s.
- The current period of low interest rates has seen households maintaining debt repayment schedules and consolidating their balance sheets. Gradually rising housing prices should enhance their net asset positions.
Since China's slowdown has hit commodity prices and export markets recently, the Reserve Bank of Australia lowered its policy rate to a historic low of 2.5% to boost economic growth and exports (lower the Australian dollar). But the main focus is on its housing sector because home prices and the unemployment rate have been rising in tandem and making new highs, which doesn't seem like a sustainable relationship (source: Investing Daily, ABC, ABC, ABC, WSJ, Bloomberg, Bloomberg, Bloomberg). Also monitor Australia's demographic trend (inverse dependency ratio) versus its real home price index.
After the U.S.'s credit bubble and asset price bubble popped, the reflexive nature of the financial markets and economy and the exposure of asymmetric information in the financial system caused a vicious negative feedback loop that caused a systemic banking crises.