Markets

Jan 11, 2012

Is Australia’s housing bubble finally close to bursting?

One of the world’s last and greatest house price bubbles is finally ending, argues economist Steve Keen.

Mortgage debt is by far the largest component of debt in Australia today — government debt, which is the focus of political debate, is trivial by comparison (a quick caveat though: finance sector debt may be larger again than mortgage debt, if this claim, sourced from Morgan Stanley, is accurate, since it shows Australia’s aggregate private debt ratio as almost equal to that of America).

The household debt to income ratio may have topped out now, after growing five-fold in the last two decades. Figure 2 shows the ratio of household debt to disposable income, which peaked at 149% of disposable income back in late 2008. Despite the enticement into debt given by the first-home vendor’s boost, aggregate household debt never exceeded this pre-boost peak as a percentage of disposable income, since the fall in personal debt outweighed the rise in mortgage debt.

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16 comments

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16 thoughts on “Is Australia’s housing bubble finally close to bursting?

  1. Phen

    These economists love a good ol’ graph dont they? Just a lazy 13 in this article….

  2. Captain Planet

    Presumably this is the same Steve Keen who predicted a 40 % fall in Australian house prices back in 2009, and wound up losing a bet with Rory Robertson.

    Mr. Keen walked 200 km from Canberra to the top of Mt. Kozsiusko wearing a T shirt that said, “I was hopelessly wrong on house prices! Ask me how.”

    http://www.news.com.au/business/economist-steve-keen-loses-housing-bet-against-rory-robertson/story-e6frfmbi-1225793985120#ixzz1j8FWjr00

    Although the economics behind Mr. Keen’s argument, on first glance, appears sound and convincing to the economically illiterate (me), the present history of mr. Keen’s predictions is somewhat less than reliable.

  3. Gavin Moodie

    @Phen

    True, but in this case I find the graphs more informative than a bunch of tables and it is hard to escape economics’ character as a numerical discipline. You’re lucky that Keen didn’t throw in a couple of equations, which all ‘proper’ economics papers include.

    Thus far I’m persuaded by Keen. However, I don’t think even he would describe himself as an orthodox economist and it will be interesting to read whether his view is supported by other economists. A comment from Quiggin would be interesting. There’s nothing on his blog yet.

  4. Toypoodle

    meh. but the trend toward vulnerability has been around for a while. there’s clearly a plateau in prices but is a big fall likely? there is little in this article on ‘triggers’. There’s the mining export boom vis the slowdown in retail/ services. there’s current round of rate cuts. yes there’s vulnerability but big falls? too hard to say…

  5. negativegearmiddleclasswelfarenow.com

    Keen picked the GFC.

    House prices will continue to fall.

    Trouble in China and they will crash.

    $2 trillion is one big bubble.

  6. Jones Tristan

    I expect prices to be stable or decline slightly unless China’s economy goes into a major downturn, then they will crash.

  7. Bultaco Metrella

    Let me leave the debunking of this to:-

    http://christopherjoye.blogspot.com/2011/12/debunking-steve-keens-predictions.html

    The real estate market is far more complex than these simple nostrums.

  8. AR

    A broken clock is right twice a day so, eventually Keen will be correct and eventually we’ll all be dead, as said another economist.

  9. Willie C

    Check out this article for a view from an Irish economist on the Australian housing market (from yesterday)

    http://www.davidmcwilliams.ie/2012/01/11/tremors-from-australias-crash-will-reach-our-shores

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