Australian housing market 'a time bomb'

Thanks to Dah Hui Lau for passing this along.

THE Australian and British housing markets are the last two bubbles left in the wake of the financial crisis, and it is only a matter of time before they crash, warns legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham.

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The Australian reported he said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.

"You cannot possibly miss it," he said.

"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times).

"Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be."

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In Australia's case, Mr Grantham described the housing market as a "time bomb" just waiting for interest rates to increase and become impossible to support.

Since last October, the Reserve Bank has raised the official cash rate six times. The rate is now 4.5 per cent.

If the Australian housing market did not return to the normal multiple of family income, he said "it will be the first time in history."

"Sooner or later, the rates will go up and the game is over."