Will Australia’s Economy Collapse in 2026? 5 Dominoes That Could Change Everything [APS124]

Global debt just hit $ 330 trillion. Divide that by every person on Earth, and you get $ 40,000 each. Australia’s included in that number. But here’s the thing—debt isn’t even our biggest problem. Households are stretched thin, interest rates are still high, unemployment is creeping up, and mortgage growth has basically stalled. Five dominoes, all wobbling at the same time. If they fall together in 2026, what happens to Australia?

I spent a full week digging through reports from the Reserve Bank, the ABS, APRA, the IMF, and all four major banks. Today I’m breaking down each domino, one by one, showing you how much damage each could do. The real question is—will they actually fall at the same time and drag Australia into recession?

The Global Household Stress Test

Let’s start with Domino One—global household financial stress. And we’ll begin with the biggest economy in the world.

New York Fed data shows that American households owe $ 18.5 trillion. That’s 4.2 trillion more than before the pandemic. Credit card default rates have jumped to 3 per cent. Translation? One in every 30 Americans swiping plastic can’t pay their bill.

Consumer confidence is sitting at 54. It’s been below 65 for eleven months straight. Why does 65 matter? That’s the recession warning line. Americans have been nervous about the future for almost a year now. This is the world’s largest consumer market—over 300 million people are afraid to spend. Car loan defaults are rising, too. When people can’t even make car payments, you know something’s wrong. This kind of spending pullback will eventually ripple across the globe.

Now let’s look at Germany. GDP has gone backwards two years in a row—down 0.3 per cent in 2023, another 0.2 per cent in 2024. Among the G7, Germany is the only one shrinking. The IFO Business Climate Index dropped to 87.6—almost the lowest since the pandemic. Manufacturing PMI has been in contraction for 30 straight months. German business owners are more pessimistic now than when COVID first hit. Germany is Europe’s economic engine. When the engine stalls, the whole train slows down.

Finally, New Zealand—our neighbour. Property prices there are down 17.5 per cent from their January 2022 peak. Wellington got hit harder—down 25 per cent. Adjust for inflation, and real prices have fallen by over 31 per cent from late 2021. That’s the deepest correction in New Zealand’s modern housing history. Silver lining? The Reserve Bank of New Zealand has cut rates by 175 basis points, and the market is showing signs of stabilising.

So what’s the verdict on Domino One? Global households are under pressure—that’s real. But we’re not at 2008 levels yet. American mortgage defaults are actually still stable. This is stress, not collapse. The question is, if pressure keeps building, does it trigger something bigger? That’s where Domino Two comes in.

The Debt Bomb Everyone’s Ignoring

Domino two—global debt and borrowing costs.

The IMF just dropped a warning. Global debt has crossed 330 trillion dollars. Let me put that differently—80 per cent of the world’s economies have more debt than before the pandemic, and it’s growing faster. Governments everywhere are borrowing just to keep the lights on. But borrowed money has to be paid back, with interest.

The US national debt stands at $ 37.4 trillion. The debt ceiling was just raised to 41.1 trillion. What’s more interesting is that foreign buyers are quietly stepping away. Japan sold 27.3 billion dollars of US Treasuries in December 2024, bringing its holdings to 1.06 trillion. China has gone from holding 1.3 trillion at the 2013 peak to just 759 billion now—a 42 percent drop. Countries used to fight over American debt. Now they’re walking away.

What does this mean? America has to offer higher yields to attract buyers. Higher yields push up borrowing costs across the board. For Australia, our interest rates are tied to global funding costs. When US Treasury yields rise, our rates follow. That’s why, even after the RBA cut rates three times, the big four banks went the other way and raised fixed mortgage rates. Global money costs what it costs. Australia can’t escape that.

Here’s the good news, though. On the global debt scoreboard, Australia is near the top of the class. Federal government net debt is only about 20 per cent of GDP. Total government debt is just 32 per cent. Compare that to Japan at 260 per cent, the US at 121 per cent, the UK at 100 per cent, and Germany at 65 per cent. Australia’s 32 per cent is among the lowest in the developed world. If things go wrong, our government still has room to move.

Fitch confirmed in October 2025 that Australia keeps its AAA rating with a stable outlook. The Parliamentary Budget Office ran 27 economic scenarios, and in 25 of them, Australia’s debt ratio declines, not rises. Unless something extreme happens, we’re getting better, not worse.

Where are global rates right now? The Fed is at 3.5 to 3.75 per cent, the ECB at 2 per cent, the Bank of England at 3.75 per cent, and the RBA at 3.6 per cent. The only central bank raising rates is the Bank of Japan, which just hit 0.75 per cent—the highest since 1995. Japan's end of its zero-rate era will shake up global money flows, but there’s no direct hit on Australia yet.

Domino two verdict? Global debt is at record levels, and borrowing is getting more expensive. But Australia’s balance sheet is one of the cleanest among rich countries. This domino’s direct impact on us is limited.

The Job Market Is Shifting

Domino three—employment. This one worries me most.

There’s an old saying in economics. Recessions don’t start with unemployment; they end with it. By the time unemployment spikes, the economy has been hurting for a while. So don’t watch unemployment—that’s a lagging indicator. Watch job ads. When companies stop hiring, they’re telling you something about how they see the future.

SEEK data shows job ads dropped 12.2 per cent year on year. Eight out of twelve months saw declines. That’s seven consecutive months of falling ads with no sign of turning around. Tech, retail, and construction are cutting back the most. Big companies are letting people go. Small companies are frozen, waiting to see what happens. The vibe in the job market has changed.

Current unemployment? ABS data for November 2025 shows 4.3 per cent, up from 4 per cent at the end of 2024. The employment-to-population ratio hit a record 64.6 per cent. Participation rate at 67.3 per cent. Numbers look okay on the surface.

But there’s something hiding underneath. Full-time jobs are shrinking while part-time work is booming. Companies are swapping permanent staff for casuals to cut costs. That’s not healthy growth. Full-time work comes with benefits and security. Part-time? You could be gone tomorrow with nothing to fall back on..

Domino three verdict? Headlines look fine, but the deeper numbers are flashing warnings. Unemployment will probably sit around 4.3 to 4.5 per cent through 2026. Not a collapse, but definitely under pressure.

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The Mortgage Engine Hitting the Wall

Domino four—and this is the big one—mortgage growth may have peaked.

Why does this matter so much? Here’s Australia’s open secret. Our economy doesn’t really run on productivity or exports. It runs on rising property prices and people borrowing to buy. When prices rise, homeowners feel richer and spend more. Banks lend more, and it flows through the system. This model has worked for decades. But it might be running out of road.

The big four banks can’t agree on what’s coming in 2026. CBA predicts a 25-basis-point hike in February. NAB sees hikes in February and May. Westpac and ANZ think rates stay at 3.6 per cent. Two say up, two say hold. When the four biggest banks can’t agree, you know uncertainty is high.

Cotality data shows national prices rose just 0.7 per cent in December 2025—the lowest in five months. Sydney and Melbourne both went backwards, down 0.1 per cent. That’s the first monthly drop since the February 2025 rate cut. Full-year growth was 9.2 per cent, but momentum is clearly fading.

Here’s where it gets interesting. The market is splitting apart. Perth rose 1.9 per cent in December, Brisbane 1.6 per cent, and Adelaide 1.9 per cent. Meanwhile, Sydney and Melbourne went in the opposite direction. Same country, totally different markets. Population flows, industry mix, and affordability—each city has its own story now.

APRA has already stepped in. From February 1st 2026, new debt-to-income rules kick in. Loans above six times income can’t exceed 20 per cent of a bank’s new lending. This mainly hits investors. Investor lending has climbed to 36.5 per cent—the highest since 2016. APRA is basically saying, “Slow down on the borrowing.”

Good news? Mortgage stress remains surprisingly stable. RBA data shows loans more than 90 days overdue at around 1 per cent—same as pre-pandemic.

Domino four verdict? Mortgage growth is slowing, but supply is tight, and almost nobody is underwater. A crash is unlikely. Expect prices to rise 3 to 7 per cent in 2026, with cities moving in different directions. Perth and Brisbane keep leading. Sydney and Melbourne might go sideways or dip slightly.

Victoria’s Debt Problem

The final domino—cracks in the financial system.

Everyone’s asking about Victoria. Fair enough—their finances aren’t pretty. Net debt is projected to grow from 155.2 billion dollars in the 2024-25 financial year to 194 billion by 2028-29. Debt as a share of the state economy will peak at 25.2 per cent in 2026-27. Interest payments? 28.9 million dollars every single day. By 2028-29, annual interest costs will hit 10.6 billion. That’s money that could build hospitals, fix roads, and fund schools. Every morning, Victorian taxpayers wake up owing 28.9 million in interest before anything else happens.

Does this mean the whole financial system is at risk? Not really.

Australia’s big four banks have core capital ratios of 12.4 per cent—well above the 4.5 per cent minimum. APRA ran stress tests in which GDP fell by 15 per cent, unemployment hit 13 per cent, and property prices crashed by 30 per cent. Result? All eleven major banks stayed solvent. Even under extreme scenarios, the banks don’t fail.

What about non-bank risks? The RBA says 45-50 per cent of non-bank assets are superannuation funds. These are defined-contribution funds that can’t use leverage directly—nothing like the UK pension crisis of 2022. Private credit is tiny, just 2.5 per cent of business debt.

Domino five verdict? Keep an eye on Victoria, but the overall system is solid. Banks are well-funded, regulation is tight, and systemic risk is low.

What 2026 Actually Looks Like

Five dominoes analysed. What’s the real outlook for 2026?

Mainstream forecasts show GDP growth rising from 1.8 percent in 2025 to between 2.1 and 2.3 percent. The RBA says 2.2 percent, Treasury says 2.25 percent, and Westpac is most optimistic at 2.4 percent. Inflation fell to 3.4 percent in November 2025, with core at 3.2 percent. It should keep falling in 2026, though hitting the 2 to 3 percent target band isn’t guaranteed. Unemployment will probably settle around 4.3 to 4.5 percent.

Property forecasts are wide. SQM Research has a base case of 6 to 10 percent growth, an optimistic case of 10 to 14 percent, pessimistic case of 4 to 8 percent. Cities will keep diverging. Perth could see 12 to 16 percent, Brisbane 10 to 15 percent, Sydney just 1 to 4 percent, and Melbourne 4 to 7 percent.

My Take

After all this data, here’s what I think. Australia’s economy won’t collapse. Here’s why.

Government debt at 32 percent is the lowest among developed nations—nowhere near Japan’s 260 percent or America’s 121 percent. Bank capital at 12.4 percent is well above requirements, and stress tests prove they can handle extreme shocks. Property supply is extremely tight, so there are no crash conditions. Unemployment will rise but stay within full employment range—not enough to trigger mass defaults.

What would it actually take to collapse? Everything would need to go wrong at once—a global financial crisis, APRA clamping down hard, unemployment above 6 percent, rates above 5 percent, and property falling more than 10 percent. The odds of all that happening together? Experts estimate 5 to 10 percent.

Most likely scenario for 2026? GDP grows by 2.1 to 2.3 percent in a mild recovery; inflation keeps falling; unemployment stabilises around 4.5 percent. That’s a soft landing, not a crash.

What Should You Actually Do?

So what can you do about all this? You can’t control global debt, RBA decisions, or how Victoria spends money. But you can control your own investments.

Focus on cash flow. In a high-rate environment, assets with positive cash flow handle pressure better. Don’t just chase growth—make sure rent covers costs. Avoid maxing out your borrowing. APRA tightening the rules is a hint. Don’t borrow to your limit. Leave yourself some room. Build an emergency fund. The typical Australian household has just 600 saved for emergencies. That’s not enough. Aim for three to six months of expenses. Stay liquid. Don’t lock everything into assets you can’t access quickly. If you need cash, make sure you can get it. Diversify. Not just by location—across asset types too. Property, shares, cash. The old line about eggs and baskets never gets old.

The 2026 market is more complicated than recent years. Rates, inflation, jobs, regulation—everything’s moving at once. Going it alone is risky. VISION Gold Membership at AusPropertyStrategy takes that problem off your hands. Check the description or the website for more information.

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