Australia 'leads the world in dangerous debt': Giant bank warns out-of-control spending will see households end up $700BILLION worse off as they are forced to sell their homes NEXT YEAR

  • American investment bank worried about Australian home borrowers' debt
  • Morgan Stanley feared borrowers would sell homes for a loss in 2019 to pay bills
  • It described Australia as the world's most 'exposed' to a deleveraging disaster 

By Stephen Johnson For Daily Mail Australia

Published: 02:40 EDT, 30 October 2018 | Updated: 04:42 EDT, 30 October 2018

Australian home borrowers are so in debt they will be forced to sell their properties for a loss next year in a plummeting housing market, an American banking giant fears.

With Sydney and Melbourne house prices already in a downward spiral, Morgan Stanley predicted Australians would collectively lose $700billion if they were forced to offload their real estate.

It described Australia as the world's most 'exposed' nation to a deleveraging disaster, where borrowers with little to no savings have to sell for a big loss to pay off their mortgages.

Australian home borrowers are so in debt they may be forced to sell their  homes (Cecil Hills in Sydney's west pictured) for a massive loss in a plummeting housing market

Australian home borrowers are so in debt they may be forced to sell their  homes (Cecil Hills in Sydney's west pictured) for a massive loss in a plummeting housing market

Ominously, Morgan Stanley predicted there was an 'imminent risk' this would happen in 2019 as house prices fell and credit growth slowed. 

Morgan Stanley predicted Australian house prices would plunge by 15 per cent, from their peak, which would spell the worst real estate plunge since the early 1980s.

Sydney house prices have already fallen by 7.6 per cent since peaking in June last year, while Melbourne's median values have tumbled by 4.5 per cent since November 2017, data from CoreLogic showed.

While interest rates are at a record low of 1.5 per cent, any official increase from the Reserve Bank of Australia would eat into household savings as standard variable mortgage rates rose.

With Sydney (Vaucluse pictured) and Melbourne house prices already falling, Morgan Stanley predicted Australians would collectively lose $700billion if they were forced to sell

With Sydney (Vaucluse pictured) and Melbourne house prices already falling, Morgan Stanley predicted Australians would collectively lose $700billion if they were forced to sell

'Australian households are far more interest-sensitive to RBA policy cycles than in the 1990s, even relative to a declining neutral policy rate,' Morgan Stanley said. 

Australian house rules

Sydney, down 7.6% to $976,365

Melbourne, down 4.5% to $799,657

Brisbane, up 0.8% to $539,374

Adelaide, up 0.6% to $466,636

Perth, down 2% to $475,774

Hobart, up 9.4% to $464,515

Darwin, up 2.3% to $505,414

Canberra, up 3.1% to $686,582

Source: Core Logic home value index in the year to September 30 based on median detached house prices 

Morgan Stanley forecast a hit to economic growth were Australians forced to sell their homes.

'Having fallen to just 1 per cent of disposable income, we believe that the savings rate would rise during a deleveraging phase, dragging on consumption growth,' it said in a 68-page report.

It calculated a huge plunge in wealth if property owners sold their assets to meet debt repayments.

This would be disastrous for borrowers who owed more than their property was worth, in a situation known as negative equity. 

'If mapped across the value of all land/property owned by households, it would equate to A$700 billion of wealth devaluation,' Morgan Stanley said.

Compared with other first-world nations in Europe and North America, Morgan Stanley said Australia was 'most exposed' to high household debt problems and a weak real estate market.  

While interest rates are at a record low of 1.5 per cent, any official increase from the Reserve Bank of Australia would eat into household savings as standard variable mortgage rates rose

While interest rates are at a record low of 1.5 per cent, any official increase from the Reserve Bank of Australia would eat into household savings as standard variable mortgage rates rose

Australia's debt-to-income ratio stands at a whopping 189 per cent, with only Switzerland and Norway having more leveraged borrowers among wealthy nations. 

The American bank also highlighted the Labor Opposition's promise to scrap negative gearing tax breaks for investors who bought future existing properties, and halve the capital gains discount from 50 per cent to 25 per cent.

'Australia looks most exposed, combining high household and external leverage, weak domestic housing conditions and potential further macro-prudential and structural/tax policy adjustments ahead,' it said. 

Morgan Stanley also expected the findings from the banking royal commission to 'tighten further' already strained credit conditions.

After five years of strong capital growth, Sydney and Melbourne house prices peaked last year after the Australian Prudential Regulation Authority tightened lending rules for investors.

The downturn continued in September after the Commonwealth Bank, ANZ and Westpac raised standard variable interest rates even though the Reserve Bank left the cash rate on hold. 

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US bank Morgan Stanley worried about indebted Australians selling their homes for a loss in 2019

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