The Reserve Bank puts the value of dwellings at closer to $6.5 trillion. Loading The Bureau’s latest quarterly report clocked national home values falling 0.7 per cent in the first three months of this year, wiping $22.5 billion from Australians’ combined housing wealth. That’s a headline. Sadly for housing news hounds, both these respected institutions only report home prices every quarter, compared to the minute-by-minute valuations of the Australian Stock Exchange.

But home values are increasingly a daily concern for most of us. After a half decade run up in prices, the property market has turned. The headlines have been worrying indeed. An exodus of investors following a crackdown on investor borrowing and interest only lending. Tighter lending standards for new borrowers expected after revelations of lax lending in the banking royal commission.

A drop in foreign investors thanks to new charges. A fresh funding squeeze forcing smaller lenders to inflict out-of-cycle interest rate hikes. Loading Last week, the banking regulator signalled an end to its attempts to cool investor lending. And this week, minutes released from the latest Reserve Bank board meeting – at which it left interest rates at record lows for a now unprecedented period – reveal Australia’s top economic policy makers discussed (at length) a special report on the risks of Australia’s world-leading level of household debt.

On average, households now shoulder mortgage debt worth 140 per cent of their annual disposable income – up steeply from 120 per cent in 2012. “Households with high debt levels are more vulnerable to economic shocks and therefore more likely to reduce consumption in the face of uncertainty about their future income,” the board minutes state. Could the bottom be about to fall out of the $6.9 trillion residential property market? Prices are already on the slide.

According to the most regularly updated index of home prices by private sector outfit CoreLogic, the value of homes has fallen 1.3 per cent below their peak of last September. In Sydney, the annual decline has been clocked at 4.5 per cent. In Melbourne, the pace of price growth shrank to just 1 per cent over the past year – with prices tumbling 1.4 per cent over the last three months. Auction clearance rates are close to 50 per cent in both cities. The wildcard in this property correction is the increasing proportion of housing held by property investors, compared to owner occupiers. According to the Tax Office, about 11 per cent of the adult population owns one or more investment property, up from 7 per cent in the 1990s.

Owner-occupiers typically hold on to properties – refusing to sell – as prices fall. But investors, at least in theory, take a more calculated view. As the Reserve Bank’s assistant governor for financial stability, Michelle Bullock, spelt out in a speech in February: “The macro-financial risks are potentially heightened with investor lending. For example, since it is not their home, investors might be more inclined to sell investment properties in an environment of falling house prices in order to minimise capital losses. This might exacerbate the fall in prices, impacting the housing wealth of all home owners. As investors purchase more new dwellings than owner-occupiers, they might also exacerbate the housing construction cycle, making it prone to periods of oversupply and having a knock on effect to developers.” Assistant Governor of the Reserve Bank Michelle Bullock. Credit:Janie Barrett Politics is another wildcard, with Labor vowing to water down tax concessions on property investment if elected. However, the decision to grandfather existing investment properties could actually prompt investors to stay put. There has already been a dramatic decline in lending to investors. While overall credit growth remains robust, investor lending has declined dramatically in response to the banking regulator’s actions which began in 2014.

Encouragingly, from a stability perspective, the proportion of outstanding loans which are interest only – requiring no principal repayments – has also fallen from about 40 per cent to closer to 30 per cent. Of owner occupied debt, only 20 per cent remains on interest only terms. The more dramatic fall has occurred in investor interest only lending, which has fallen from 70 per cent to less than 60 per cent. According to the Reserve Bank’s latest Financial Stability Review, the early action of the banking regulator – which also included warnings on high loan to value ratios and required the use of higher interest rate buffers – has helped to stem mounting risks: “Regulatory measures and improvements in lending standards have contributed to a significant improvement in the risk profile of new lending over the past couple of years, and so stemmed the deterioration in the resilience of household balance sheets. Loading "However, the risk from the stock of existing loans remains. Overall, while rising a bit recently, non-performing housing loans remain a low share of the outstanding stock of loans, indicating that the overall quality of outstanding housing debt remains generally high.” Still, a large number of existing loans are scheduled to move from interest only to principle and interest between now and 2022.

Not everyone is convinced the improvement in lending standards have stamped out risks. Investment bank UBS has been vocal in highlighting risks of lax lending standards and 'liar loans' – loans written with little reference to borrower’s actual capacity to repay. Economic forecaster Capital Economics continues to warn that tighter lending standards from the banking royal commission could slow borrowing further. More optimistic forecasters point to strong population growth and record low interests rates as providing a floor for prices. Despite higher debts, servicing costs as a proportion of household incomes remain lower than before the GFC, with lower borrowing costs outweighing more sluggish income growth. And the Reserve Bank board’s consideration of debt at this month’s meeting noted that while there is a “material share” of debt owned by low income earners: “Survey data indicate that much of Australian household debt is owed by higher-income and middle-aged people, who tend to have more stable employment and often larger savings buffers.”