Why Australia’s house prices are anything but sensible
As mainstream opinion would have it, Australia’s housing prices are solidly based upon fundamental valuations or intrinsic value. This position was repeated by Terry Ryder, claiming “current prices are at sensible levels”. This is the view of the Australian government, central bank, Treasury, the FIRE (finance, insurance and real estate) sector, much of academia, and a legion of commentators, economists and analysts.
Ryder cites RBA governor Glenn Stevens who says the residential property market is not experiencing a bubble. For anyone who has followed the global property market over recent years, it is difficult not to notice that central bankers are possibly the least reliable and most incompetent of all economists when it comes to identifying asset bubbles. Their record is truly terrible, for not only completely missing trillion-dollar bubbles that formed in their own backyard; they have also continually put effort into denying these bubbles exist.
Although Ryder believes Australia is different from the US in regards to the relative economic conditions and property markets, in one aspect Australia is similar: central bankers at the RBA and Federal Reserve have gone on the record to deny that a housing bubble exists in their countries. In the US, concerns were continually raised before 2006 about the risk of a property bubble. Unfortunately, such concerns were dismissed as nonsense.
There will be more on the US housing situation later. But first a look at Australia — which has some parallels and some stark differences to the US.
There is no housing shortage here. High housing prices are not set by the forces of supply and demand but by banks’ willingness to lend, which leads to the next issue.
The leading cause of the US housing bubble was a privatised and deregulated financial system lending absurd amounts of credit to every Tom, Dick and Harry that would take it, regardless of their financial standing. This gave rise to the term “ninja” loan, borrowers with no income, no job and no assets.
Loose credit was used to speculate on the property market, generating easy profits until the bubble peaked and then collapsed the financial sector in 2008. As early as 2004, the FBI testified before Congress that there was a significant amount of fraud taking place around the banks’ lending to borrowers. These concerns were dismissed by the Bush administration.
Similar to the US, Australia has a deregulated and liberalised financial sector, having undergone numerous reforms during the 1980s and 1990s, ending the government’s heavy involvement in ownership and management during the social democratic period of the 1950s to 1970s. Unsurprisingly, the amount of credit the banking sector extended to all parts of the private sector has increased dramatically. Mortgage debt has more than quadrupled from 19% of GDP in 1990 to 84% in 2012 to a higher level than that of the US at its peak.
According to Denise Brailey, the president of the Banking and Finance Consumers Support Association (an organisation dedicated to protecting the public against predatory financiers), there is some evidence to suggest mortgage fraud is far more widespread than previously thought. Having worked in this field for the last 20 years, criminologist Brailey has seen first-hand the financial and social wreckage wrought by a multitude of scams and predatory lending.
Brailey provided testimony before the Senate Economics References Committee alleging wide-scale fraud from banks to brokers. While her testimony, which covers the period 2008 to the present, was largely about low and no-doc loans, her claims extend into the mainstream of full-doc mortgages.
“Australia does share some uncanny similarities with the US in the period before its housing market collapsed.”
Certainly, the public would know more if the ATO, ASIC and APRA bothered to look into these cases of fraud, but just like the US, regulators have been captured by the finance industry, unwilling to upset bankers and their allies in political office. Only time will reveal the extent of fraud that has taken place.
Page 1 of 3 | Next page