Despite signs that the Australian house price bubble may be popping, complacency reigns.

Sydney property prices are falling dramatically with reports of deals being struck at big discounts compared with prices a few months ago. According to CoreLogic, Sydney house prices have declined by 4.5% over the last year, but homes in some boroughs are selling at discounts to their asking price of between 6% and 16%. Melbourne, Perth, Brisbane and Darwin are also showing price declines, according to the Australian Bureau of Statistics. There is talk of the dreaded “negative equity” when the value of your property is worth less than what you owe. Forced selling is the next step in that debt deflation cycle.

Although the Reserve Bank of Australia calculates the national housing price-to-income ratio at a little over 5x (it was less than 2x in the 1980s), mortgages being granted at 8 times income have not been uncommon. Interestingly, the financial sector of the Australian stock market has just taken another dive in relative performance which could be a sign of developing stress. Nevertheless, property analysts and policy makers are relaxed, with some even pointing to recently enacted tighter lending criteria as being a positive for the housing market. Indeed, our index of Aussie property shares relative performance has yet to turn down significantly so the optimists may be correct. However, it is worth keeping a close eye on developments Down Under. With worldwide liquidity tightening, the Aussie property market could be a canary in the coal mine for the global economy.

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