Australian Housing Market Correction Spills Over into Crisis Fears

The Australian housing market is facing a correction that could potentially turn into a historic downturn. Housing prices in Melbourne and Sydney have dropped by 7% from their record highs, while national prices have fallen by 2%. The auction clearance rate has also declined below the 60% threshold that indicates a balanced market between buyers and sellers.

The major banks have warned of a further decline in housing prices, with ANZ predicting a 15% drop in Sydney dwelling prices by the end of next year. Mortgage applications have plummeted, with Westpac seeing a 20% decline in the June quarter. New loans for home investors have also dropped more than 10% in the same period.

Experts warn that the combination of three interest rate increases by the Reserve Bank of Australia and the federal government's reduction of tax incentives for property ownership has led to a decrease in demand. The inflation rate of 3.5% in the 12 months to July suggests that further interest rate hikes may be on the horizon.

Economists are concerned that if housing prices continue to fall, it could lead to a recession as consumers reduce spending due to the impact on household wealth. A significant proportion of Australians' wealth is tied up in their homes, with nearly 70% holding this type of asset.