Similarly, in Brighton, average property values peaked at about £950 in 1888 and then fell to about £400 in 1893 and £300 in 1898.

In Collins Street, sites for which £2000 a foot had been earlier rejected by vendors, were now being offered for £600 a foot – but with no buyers emerging.

Banking panic started in earnest

In Australia, real GDP contracted by about 10 per cent in 1892 and another 7 per cent in 1893.

Mortgage defaults and bank runs eventually led to a number of financial institutions going under. Between 1891 and 1893, 54 deposit-taking financial intermediaries closed their doors (with 60 per cent of these closing permanently).

The first trading bank to fail in 1893 was the Federal Bank of Australia which went into liquidation in January, but the banking panic started in earnest with the suspension of payment by the Commercial Bank of Australia in April of that year. These two banks were both exposed to the property market through loans to land finance companies.

Skip forward to the present day. So far the RBA has done a wonderful job in stimulating house prices through cutting interest rates with the flow-on effect to retail spending. The mining boom is a distant memory – at least in Victoria and NSW.

Residential property is trading at a P/E of about 50 to 80 times earnings, if one assumes a gross yield of 2 to 3 per cent and then adjusts for some costs associated with collecting rents, maintenance and rates.


As one fund manager said: "Given that it's an asset class four times the sharemarket ($6 trillion) and with a lot of household gearing ($1.5 trillion-plus), it's simply the biggest risk and issue in Australian finance."

Australia has led the world in building up household debt as a proportion of its GDP – most of it devoted to housing. Apart from their homes, middle Australia also own bank shares and bank hybrids and holds deposits with banks – it's all the same risk.

Variety of capital measures

The prudential regulator, APRA, has introduced a variety of capital measures to help protect the banks from a housing downturn.

In the past year, Australian banks have raised about $21.5 billion of common equity through a combination of discounted rights issues, share purchase plans, institutional placements and dividend reinvestment plans.

This is to offset increased risk weightings being applied against mortgages that represent 60 per cent of bank loan books.

Capital positions have also been boosted by asset sales and the issuance of more than $10.5 billion of non-common equity capital.

But provisioning for impairment remains at near-record low levels.

In October, the RBA issued a paper discussing how much protection the Australian banking sector might need to protect it against a housing downturn. It made the following comment: "There is no historical data that covers a severe loss episode, because there has not been a major housing downturn in Australia since the 1890s."

In the aftermath of the crash in 1890s they also had had problems collecting reliable data because the government-appointed statistician had been declared bankrupt.