David and Libby Koch say it’s unlikely that the residential property market will plunge.

One of the great differences between the impact of the global financial crisis in Australia compared with Britain and the US is that our residential property prices have not been crunched.

It has been so bad in the US that nearly 30 per cent of US homeowners have a mortgage worth more than the value of their home and Deutsche Bank is expecting that figure to rise to almost 50 per cent of homeowner by the end of 2011.

No wonder American consumers aren’t spending when the value of their biggest asset is plunging.

But while we seem to have avoided a property crunch, the International Monetary Fund is warning us not to be complacent because it claims Australian residential property is over-valued by 20 per cent and could be hit soon.

Thankfully, we don’t think the IMF understands our real estate sector that well.

It is very unlikely that the Australian residential property market will plunge anywhere near the extent of that in the US, because we haven’t been through a huge construction boom, borrowers haven’t leveraged themselves to quite the same extent and we have strong immigration to underpin demand.

But, and it is a big but, the tightening of bank finance will have an impact on residential property values. Again, it makes sense. It is simple investment fundamentals.

The banks are starting to ration credit that means they’re making it more difficult for people to borrow money. The banks are lifting their standards.

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We’re starting to see the good old-fashioned request for a 15-25 per cent deposit on a home loan and mortgages where the repayments must be less than 30 per cent of the borrower’s income.

Tightening the criteria for home loans means fewer borrowers will be eligible for a loan than before, so there will be fewer potential buyers and less competition in the market.

Even so, the combination of low interest rates and the incentives for first-home buyers is certainly helping keep buyers in the market.

Last week’s housing finance figures saw new housing loans at 17-month highs and loans for new home construction at a seven-year high as first-home buyer grants from the federal and state governments kicked in.

That’s great news for the property market and the wider economy.

The only concern is the property bubble at the first home-owner end of the property market for existing homes could deflate when these incentives finish.

Hopefully, investors will come back in to the market at that time and fill any void that first homeowners leave.

First-home buyers still account for 27 per cent of all new home loans being written, while investor lending continues to fall.

Investors should come back to the market in the not too distant future as interest rates stay low, the share market continues to improve and rents remain high.

The key is the rental market. As vacancy rates stay low and rents continue to rise, investors will start to trickle back in to the property market. A problem at the moment is that many investors target the currently inflated first-home buyer unit market and are simply waiting for that to cool off before they move in.

The banks are also keeping a lid on new property construction.

While tougher lending criteria limits the number of buyers in the market, that same credit squeeze is restricting the number of new developments being built and creating a property shortage.

If demand outstrips supply, a floor is put under property values and in turn investors are attracted back in to the market.

So while Australian property values are high by world standards, and you can understand the IMF’s concerns, current market conditions are more likely to protect property values for the foreseeable future.

But don’t get complacent. Conditions can change quickly and that’s why any spare savings should be directed to bring down home loan commitments to a more manageable level.

The one thing you don’t want to be at the moment is a forced seller.