Monday, January 9, 2012

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