SYDNEY — The party is finally winding down for Australia’s housing market. How severe the hangover is will determine the economy’s fate for years to come.

After five years of surging prices, the market value of the nation’s homes has ballooned to A$7.3 trillion ($5.6 trillion) — or more than four times gross domestic product. Not even the US and UK markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them.

Australia’s obsession with property is firmly entrenched in the nation’s economy and psyche, fueled by record-low interest rates, generous tax breaks, banks hooked on mortgage lending, and prime-time TV shows where home renovators are lauded like sporting heroes. For many, homes morphed into cash machines to finance loans for boats, cars and investment properties. The upshot: households are now twice as indebted as China’s.

So far, the Reserve Bank of Australia (RBA) has relied on banking regulators to apply the brakes with lending curbs. It reckons the financial system is well-placed to withstand any shocks, but isn’t so confident on consumers. That puts it out of step with developed-world peers that are incrementally tightening policy, with Governor Philip Lowe this week making clear local interest rates aren’t going anywhere soon.

To be sure, there are key dynamics that differentiate Australia’s housing boom with those that soured in recent years around the world. Aussie banks can claim against other income and assets or chase individuals into bankruptcy if borrowers default. Tax deductions for interest paid on investment loans also support demand, as does a rich pipeline of demand from Asian buyers, especially Chinese.

But with prices in major cities like Sydney finally leveling off and a wave of new apartments about to hit markets in Brisbane and Melbourne, it’s worth taking a look at housing’s out-sized influence on Australia’s economy.

1. World Leaders

The weight of Australian homes on the economy is heavier than policy makers would like. On one hand, the dizzy valuations reflect a desirable location and strong population growth. But they also reflect the massive liabilities that are now tied to these assets. “The risk is that it leaves the Australian economy extremely exposed, and a minor shock could become far more significant,” said Daniel Blake, an economist at Morgan Stanley in Sydney.

2. Gung-ho Banks

The increasing treatment of housing as a financial commodity has seen borrowers rush into a byzantine maze of mortgage-related products. That’s made banks very profitable, but very exposed. While the RBA is satisfied that lenders have adequate buffers to cope with any downturn, banks may find it harder to value their collateral in a falling market as investors look to consolidate their portfolios of multiple homes, said Mr. Blake.

3. Borrowing Binge

Aussie households have racked up record private debts and aren’t getting the pay rises to help service them. That’s a core concern for the RBA and frequently cited as a deterrent for hiking interest rates. Macquarie Bank has said such debt levels mean any hikes will have triple the impact on consumers than tightening cycles in the mid-1990s. With retail sales looking grim and wage growth near record lows, debt will likely vex policy makers for years.

4. Out of Reach

Soaring prices have seen home ownership among young Aussies fall to the lowest level on record, squeezing out all but the wealthiest buyers. Fueled by cheap money, a lack of supply and a tax system that favors property investors, Sydney has vaulted past London and New York to rank as the world’s second-most expensive housing market. Sydney housing prices fell for a second straight month in October, while national values flat lined.

5. Still Building

While cranes dot the Sydney skyline for miles, the central bank remains confident that population growth will eventually fill all those new apartments. Its worries about a Melbourne glut have eased off recently, with the main concern in the Brisbane market, where peak completion is expected this year, capping a three-year period in which the number of apartments has increased by more than a third. Overseas buyers comprise up to 15% of new dwelling purchases nationwide, according to the RBA.

“Australia’s world-record housing boom is officially over,” UBS Group AG economists declared at the start of this month. “The cooling may be happening a bit more quickly than even we expected.” — Bloomberg

KUALA LUMPUR — Aida Widyawati boards a commuter train each day to travel from her home in South Tangerang, west of Jakarta, to her job as an office manager in the centre of Indonesia’s capital. The 120-km. (75-mile) round trip takes three and a half hours on a good day.

Last month, the mother-of-two sprained both ankles falling down some stairs at home and was forced to take a taxi to work. Her total journey time rose to six hours. In the monsoon season, her commute time can easily double.

“It is very boring,” said Widyawati, who tries to catch up on sleep during her travels to work. “I just hope that the government will one day offer a better service.”

Widyawati is one of more than 5 million people struggling to get to work each day in Southeast Asia’s largest city.

Known as the “Big Durian” after the stinky fruit popular in the region, Greater Jakarta is home to about 25 million people and faces numerous challenges due to rapid urbanization, climate change and the failure of infrastructure and public transport to keep pace with its expansion.

In addition to its infamous congestion — which is often cited by traffic studies as the worst in the world, and costs the city an estimated $3 billion per year — Jakarta also suffers from water scarcity, poor sanitation, regular flooding, air pollution and a lack of affordable housing.

Last year the mega-city joined 100 Resilient Cities, a network backed by The Rockefeller Foundation to help cities deal with 21^st century pressures.

The Resilient Jakarta Secretariat, set up this September, has since brought together government officials, researchers, businesses and citizens’ groups to map the city and pinpoint issues that will be outlined in a first report due to be published in two weeks.

Oswar Mungkasa, Jakarta’s chief resilience officer, told the Thomson Reuters Foundation his city has at least three major problems: transportation, flooding and land subsidence.

STUCK IN A JAM
Vehicle emissions, made worse by Jakarta’s jams, account for 70% of air pollution in the city. Besides the economic costs and negative effects on quality of life, the pollution puts extra pressure on public health services.

But in a city where pedestrians and motorcyclists often face off over the use of ramshackle pavements, some steps are being taken to help ease congestion.

Construction of the $3-billion Jakarta Mass Rapid Transit (MRT) railway began in 2013, and it is likely to be up and running by 2019, when a light rail transit is also due to open.

“We are trying to solve the problem,” Mr. Mungkasa said. “In two or three years after the MRT (is built), the situation will be much, much better.”

Jakarta has also implemented an odd-even license plate policy for key roads to limit private car use in busy hours, while many residents have embraced motorcycle taxi apps in an effort to beat jams.

Critics note, however, that the MRT project will only connect South Jakarta to the city centre, and will therefore not be a silver bullet to cure chronic traffic problems.

There are also questions over whether the new train networks will be integrated with existing public transport, like the TransJakarta bus rapid transit system.

The city must develop a “push-pull strategy” to discourage private vehicles while incentivizing public transport use, said Shobhakar Dhakal, head of the energy, environment and climate change department at the Asian Institute of Technology (AIT).

“But without giving proper options it doesn’t work,” he said, adding Jakarta should have built a metro train system two decades ago.

THAT SINKING FEELING
A coastal city built on a swampy plain, roughly 40% of Jakarta is below sea level. Making matters worse, most residents and businesses rely on wells that drain underground aquifers for their water supplies, resulting in the city sinking by 5-10 cm. each year.

Rising sea levels and the inability of crumbling infrastructure to cope with excess water during heavy storms and the monsoon season result in regular flooding.

Resilient Jakarta’s report will ask how health and well-being can be improved through better water and waste management.

The city is working hard to solve these problems, said Mr. Mungkasa, with improvements to water infrastructure, including the piped supply, and new waste water treatment facilities set to be built over the next 20 years.

Jakarta’s piped water network needs to be expanded to both poor and wealthy neighborhoods, said Marcus Lee, a senior urban economist at the World Bank in Jakarta. Because well water is free and often seen as cleaner, the government must also enforce piped water usage where accessible, he added.

The city’s slums — many located on land vulnerable to flooding — are another challenge, said Mr. Lee.

New housing estates, often backed by government cash, tend to be built where land is cheaper, outside commercial areas.

“If you’re able to afford a house, chances are it’s going to be very far away in the suburbs,” said Mr. Lee. “That’s contributing to the urban sprawl and links back to the transportation problem.”

PLANNING FAILURE
AIT’s Mr. Dhakal said most major Asian cities are grappling with “a failure of urban planning.” “Since the 1960s and 1970s, when these mega-cities started growing, urban planning did not work very well. This still (plays) a very strong role,” he added.

Developing long-term strategies to build resilience has been a low priority for politicians who tend to focus on quick wins during a four to five year election cycle, he noted.

Resilient Jakarta’s Mr. Mungkasa acknowledged that a fragmented approach had not helped in the past and stressed the importance of improving local governance to create a “habit of preparation” for shocks that might hit Jakarta.

“We need to make sure the government is ready and has the strategy and capabilities to face these problems,” he said.

It could also learn from other Asian cities, including Bangkok and Singapore, which are part of 100 Resilient Cities and have shared their experiences at workshops.

The Thai capital released its resilience strategy earlier this year which tackled flooding and water usage, while Singapore is pumping billions of dollars into public transport and tightly controls car use and ownership.

Back in Jakarta, commuter Widyawati conceded that the commuter line has improved in the past couple of years. “Things are slowly getting better,” she said. — Thomson Reuters Foundation