The Australian property bubble
Friday, September 30th, 2011The Economist magazine recently published yet another of its surveys estimating Australian houses are ”overvalued” by 56 per cent – the highest in the world – on a historical ratio of rents to house prices.
As property prices increased in the late 1990s and early 2000s, people saw their neighbors getting rich. This encouraged them to pay more for property. This caused property prices to rise further (aided by unbalanced government policies like negative gearing, CGT discounts and the first home owner’s grant).Whilst property prices rose, the yield on the asset fell. But that didn’t matter, as people expected the price of the housing to continue to rise, simply because they had known nothing different. It actually began to feel like property prices simply could never fall.
But they can. And in some places, like Melbourne, they already have.
The added problem with bubbles is that they are in most cases funded by debt. Debt is a particularly sinister beast — friendly during good times, bitter foe during bad. While debt will magnify the returns of equity, it will also quickly wipe out that equity when prices plummet.
Dr Andrew Wilson, senior economist of Australian Property Monitors, says with figures in February showing lending to first home buyers near a record low, we might be seeing an “adjustment process” after demand was boosted by the Government’s first home buyers grant during the GFC.
Wilson warns while we might be seeing the signs of first home buyers abandoning the market, they might end up shooting themselves in the foot.
“If demand flattened at the bottom end, I think that’d be a signal for investors,” he says, saying investors had been sitting on the sidelines since mid-2010, putting their money into high-interest deposit accounts instead.
House prices only fall when people are forced to sell their homes. Otherwise, households choose to simply remain in their home and wait things out. Property investors are loath to realize their capital loss. But for there to be a true collapse in house prices, which would indeed require some large external shock – a doubling of unemployment or interest rates – to trigger the wave of forced home sales that it would take to provoke house price falls. With low joblessness in Australia and the big surge in national income created by the national mining boom, it is hard to see the trigger for such an event.
The Reserve Bank has also sought to dispel fears of a bursting property bubble by pointing out that the rise in debt levels has been mostly at the hands of those who can most afford it. Those predicting big house price falls should also recall the recent experience during the GFC when policy makers, confronted by an external shock capable of puncturing house prices, acted quickly to cushion the economy with interest rate rises and fiscal stimulus.
As for the crash, the housing collapse is now part of a bigger, much wider recession that’s going to take out huge chunks of the economy and it’s accelerating now. The Aussie dollar is being held up by sentiment, luck and sticky tape.
Prices cannot, and will not, stay at these ludicrous prices.
Just watch them fall.RegisterAn Englishman’s Home is his CastleThe King’s Conundrum