There is a lot more to the destructive potential of housing price booms than how high prices and total debt rise in the first place, according to Reserve Bank of Australia economists.

Amid the perennial calls from the building industry for greater flexibility in the supply of housing, the RBA study produces a finding that may seem surprising.

"We show that when property supply is more flexible, the distribution of debt at the end of a boom is more likely to trigger episodes of financial distress and instability," Luci Ellis, head of the RBA's Financial Stability Department, and fellow economists Mariano Kulish and Stephanie Wallace said in a draft of a paper presented to a conference in Sydney yesterday.

They take as an example Atlanta, Georgia, where the run-up in housing prices ahead of 2007 was much more muted than in other cities such as Los Angeles and Phoenix, where prices ballooned most spectacularly.


Yet borrowers in Atlanta were at least as likely to get into trouble as their counterparts in states most associated with the housing bubble like California, Arizona and Florida.

Vulnerability to the property price cycle is more about who is ending up owing what than about the size of the price rise.

Interest-only loans are more likely to leave borrowers with less equity in their properties when prices fall.

Loans that have to be renegotiated or rolled over frequently provide trigger points where borrowers having "negative equity" - owing more than the value of the property - might default.

And longer build times mean a bigger overhang of unwanted property coming on to the market well after prices turn down.

Commercial property loans typically have these features of loan type, contract features and build time, so can be more dangerous for stability than home loans, they say.

But for either market, the flexibility of supply for new property is crucial.

If supply is responsive to a pick-up in demand, the price surge will be smaller in a boom. That is what happened in Atlanta, where plenty of new homes were able to be constructed as prices headed upwards.

That smaller price rise might suggest less damage was likely when the boom went bust, but that is not necessarily true, the RBA economists say.

"If supply is quite responsive, large amounts of new property will be constructed during the boom, creating an overhang of excess supply once the boom ends," they say.

As a result, prices can fall further despite the more muted upswing, putting people who had bought homes more than a decade before price peak into negative equity.

What's more, the greater availability of properties to buy during the boom means a great proportion of home-owners bought near the peak.

So it's not so much the size of the debt, but the type of debt and who owes it that matters, and the supply response is a big part of that.

"Our results imply that the level or change in aggregated indices of asset prices are not good guides to predicting the extent of financial distress during the bust, and neither is the amplitude of the cycle in credit," they say.