More international bearishness and worries about the social impact of the housing boom, let alone the bust – this time from the left-leaningNationmagazine in the US. It warns “Take Washington, where, according to the estimates of real estate agents and builders (as reported in TheWashington Post), prices have risen by about 15% since the beginning of this year – add that to the 21% rise last year and the 89% rise over the last five years, and you may have the American equivalent of Tulipmania…”

Why is this so bad? What’s the social impact? How about the lessons for Australia? What’s it mean for local politics? The Nation’s focus switches to California – and suddenly it all falls into place:

In the last five years median home values have increased 118% in Los Angeles and an extraordinary 137% in neighbouring San Diego. Homes, as a result, have become private ATM machines, providing their owners with magical, unearned cash flows for purchasing new sports utility vehicles, making down payments on vacation homes, and financing increasingly expensive college educations for their kids. Second mortgages and home refinancings, according to a Wharton Business School survey, have generated an astounding $1.6 trillion in additional consumption since 2000.

The great American housing bubble, like its obese counterparts in the UK, Ireland, the Netherlands, Spain, and Australia, is a classical zero-sum game. Without generating an atom of new wealth, land inflation ruthlessly redistributes wealth from asset-seekers to asset-holders, reinforcing divisions within as well as between social classes…

The current housing bubble is the bastard offspring of the stock-market bubble of the mid-1990s… The boom has been sustained by sensationally low mortgage rates, thanks principally to the willingness of China to buy vast amounts of US Treasury bonds despite their low or negative yields. Beijing has been willing to subsidise American mortgage borrowers as the price for keeping the door open to Chinese exports… The most successful speculator, of course, has been George W Bush. Rising home values have propped up a stagnant economy and blunted criticisms of otherwise disastrous economic policies.

The Democrats for their part have failed to address seriously the crisis of millions of families now locked out of home ownership. In a bubble city like San Diego, for instance, less than 15% of the population earns enough to finance the cost of a median-value new home.

Accordingly, if ‘values’ were the basis for the Bush victory last November, they were property values not moral principles or religious prejudices. In the face of the perverse housing bubble, the Kerry campaign, as with healthcare costs and the export of jobs, was simply running on empty. It offered no compelling alternative to the status quo. But the Republicans have more serious things to worry about than Democrats. As the real-estate bubble reaches its peak, George Bush may discover that he has been surfing a tsunami and that a towering cliff looms ahead.

For Democrats, substitute the ALP. What was that last week about Labor needing some new thinking?

Peter Fray

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