The End of Australia’s $2 Trillion Housing Party - By Philip Soos
Found via the Corner of Berkshire & Fairfax.
Executive Summary
A great deal of debate has occurred in Australia on the notion that the residential property market may be experiencing a bubble, set to burst in a similar fashion to that in the United States. Over the last decade and a half, housing prices have risen substantially since 1996. The lack of affordable accommodation within the capital cities where most Australians live has resulted in concern about the viability of purchasing a home, especially for first home buyers. Rising housing costs have placed many Australians under a heavy financial burden, primarily that of paying down the mortgage on owner-occupied properties.
Despite the misgivings of the public, the economic and financial authorities – the Reserve Bank of Australia, the Treasury, the major commercial banks and real estate industry – have provided assurance that a bubble does not exist and the “doom and gloom” scenarios of a downturn in prices is implausible, the result of fear-mongering. On the other hand, a number of Australian and US economists have offered analyses countering the mainstream account. Some of them accurately predicted the US housing bubble and global financial crisis.
Many property related ratios and valuations, for instance, house price to rent, household debt to assets, median house price to income multiple, mortgage debt to GDP, and household debt to disposable income, indicates that residential property is severely overvalued. Having tracked the rate of inflation from 1992 to 1996, house prices have increased substantially by 127% during 1996-2010, indicating that prices are no longer in step with underlying fundamentals. Rents have not moved in line with housing prices, and it has been found that Australia has no shortage or undersupply of housing.
Without further government intervention in the property market, a collapse in housing prices appears unavoidable, with prices peaking in the last quarter of 2010. While a “soft” landing can be hoped for, the likely result will be a severe recession or a debt-deflation, with values declining by approximately 40% in order to return to underlying fundamentals. If this unwanted outcome occurs, it is argued that the most efficient course of action is to follow the Swedish model of the early 1990s crisis and bail out debtors by writing down debts commensurate with the ability to pay while ensuring that creditors are held responsible for their role in over-lending and thus playing a primary role in the formation of the bubble.
....................
Related link: Australian House Prices--again - By Steve Keen
- Investors Should Be Thinking 90% About Supply...
In one of the interviews Edward Chancellor gave recently, he made the comment below, which I think was probably the most practical investing lesson that can be used going forward:Ed: And this interesting point is that people, I don’t quite know why,...
- Australian House Prices In 2012 - By Steve Keen
The ABS house price data for December 2011 has just been released, and it shows that house prices fell 4.8% in nominal terms between December 2010 and December 2011. The usual suspects are already trying to see this as marking the bottom, while “just...
- Why Some Housing Bubbles Remain - By Edward Chancellor
Housing bubbles appear pretty similar on the way up. Yet the aftermaths of recent real estate booms in the US, UK, Spain and Australia have been extremely varied. US home prices took a real hammering. The formerly hot housing markets of the UK and Spain,...
- Hussman Weekly Market Comment: Oil And Red Ink
From earlier this week. Similarly, before the housing crisis, it might have been tempting to shrug off mortgage defaults as relatively isolated events, since the price of housing had generally experienced a long upward trend over time. Indeed, historically,...
- Wsj: First, Let's Stabilize Home Prices - By R. Glenn Hubbard And Chris Mayer
We are in a vicious cycle: falling housing values cause losses on securities, which reduce bank capital, thereby tightening lending and causing house prices to fall further. The cycle has spread beyond housing, but housing is the place to fix it. Housing...