Will it burst?
28% of mortgage borrowers are first-home buyers and their average initial debt has risen by $50,000 to $300,000 over the past year. Of course over the past year the standard mortgage interest rate has fallen from 9.10% to 5.60% so the annual interest payable on a $250,000 loan a year ago was $22,750 whereas the interest payable on a $300,000 loan today is $16,850 so that, if anything the interest cost of borrowing has fallen. In addition since house prices have dropped somewhat over the past year borrowers are getting more bang for their buck.
Of course it might be the case that levels of indebtedness were excessive a year ago. It is also very likely to be the case that future interest rates will be unlikely to persist at current levels if the financial crisis eases. A burst of inflation with markedly higher interest rates of say 12% per annum would leave those with $300,000 mortgages paying a mind-boggling $36,000 annually just to service interest. That would be a blowout in interest payments of nearly 60% and that would burst the bubble. Given the amount of money and debt floating around in the international economy how many economists would assign a zero probability to the chance that we will shortly experience a burst of inflation and much higher nominal interest rates?