In the 1990's, Japan's economy experienced what economists now refer to as "the Lost Decade", all driven by a property and stock market crash. Some are claiming this could happen to Australia, as housing continues to rise stratospherically and the stock market begins a pullback. So, is it possible?

I was spurred to take a look into this over the weekend by a tweet I saw last week.

The Australian housing market is now valued at $12 trillion AUD. Approx 450% of Australian GDP.

The Japanese housing bubble at its absolute height was about 460% of Japanese GDP.

Japan stagnated for 30 years after their bubble burst.

We are fucked. https://t.co/i0T3JZ9SwS pic.twitter.com/4MD22Dw7aa

— Drew Pavlou 🇦🇺🇺🇸🇺🇦🇹🇼 (@DrewPavlou) November 13, 2025

Pardon the French in the above, but it got me wondering: could we see a "Lost Decade" here?

The Lost Decade

Japan’s “Lost Decade” began with a property and stock market crash in the early 1990s.

The roots of the crisis go back to the late 1980s, when land and share prices in Tokyo shot into the stratosphere. Easy money and wild optimism led banks to lend freely against assets that seemed only to rise. When the Bank of Japan hiked interest rates to stop runaway speculation, the bubble burst.

Prices fell, bad debts spread, and banks spent years propping up failing borrowers instead of admitting their losses. The fallout toxic to Japan's economy.

Growth stalled, deflation set in, and it took more than a decade for confidence to return. Japan’s economy, once a global powerhouse, struggled to regain momentum.

Even today, the legacy of the Lost Decade shapes its economy and policy.

Australia now vs Japan then

Australia today shows a few striking parallels to Japan at the peak of its bubble. Property is a national obsession and prices keep rising. Data from Cotality, APRA, the RBA and the ATO show the scale of the dizzying numbers.

The total value of residential real estate in Australia is now around $12 trillion, spread over 11.4 million dwellings. Property now makes up about 55% of household wealth, far outstripping superannuation at $4.3 trillion, the share market at around $3.5 trillion, and commercial real estate at just over $1 trillion. The median house price in Australia’s capitals sits around $950,000, and in Sydney it is well above $1.2 million. And Government policy isn't helping to cool it down, either.

Measures like the First Home Guarantee, which lets buyers in with a 5% deposit, keep new demand coming. Negative gearing remains entrenched, fuelling investor appetite for more property. Tax breaks and incentives make housing attractive as an investment, even when prices are out of reach for many young families and first home buyers. All of this combines with persistent low unemployment, high-ish migration, and a housing shortage to create an environment where property prices appear bulletproof.

Japan in the late 1980s saw similar patterns. Lending standards were relaxed, speculation was rampant, and most of the country’s wealth was tied up in assets that only seemed to go up. The warning signs, in both cases, were ignored because the belief in the property market’s strength was absolute.

Could it happen here?

In short, probably not. But I'm no economist. I'm merely a student of economic history. Let me explain.

Japan's downturn was fuelled by cheap credit, government incentives, and a sense that property could never fall. Those are all things we see in Australia right now. If enough things go wrong at once, sure, a sharp downturn is possible. But there are key differences that would backstop the downturn so it doesn't decay the entire economy.

Our population is still growing quickly, fuelled by decent migration numbers, which keeps demand for housing strong. Japan’s population at the time was peaking and starting to decline as its bubble burst.

Australia’s banks are also more tightly regulated. They are regularly stress-tested and required to hold more capital than Japanese banks ever did. Some Japanese banks even concealed how bad the problem was, which is highly unlikely in our highly-regulated market.

Still, the sheer size of the property market means any downturn in property would have widespread fallout. When more than half of all household wealth is tied to property, even a moderate fall in prices would hit confidence, spending, and investment across the economy. Many recent buyers have taken on large mortgages at historically high prices, leaving them exposed if interest rates stay high or if unemployment rises.

A sharp rise in unemployment could force more people to sell, pushing prices down quickly. If global shocks or policy mistakes led to a spike in interest rates, mortgage repayments could become unmanageable for many households, especially those who bought recently. Another risk is a collapse in migration. Much of the current demand for housing depends on steady population growth. If migration policy changes, or if international events make Australia less attractive, demand could fall fast.

There’s also the chance that a change in investor sentiment, sparked by a policy shift or tax change, could turn the tide. If enough investors decide to exit the market at once, prices could drop in a hurry. The interconnectedness of Australia’s economy means that a big property correction would quickly affect jobs, consumer spending, and even the banking sector.

While the exact recipe for a new "Lost Decade" isn't present in Australia, that doesn't mean we're immune from a serious hit if property ever loses its biblical status in this country.