Feb 15, 2013

Why Australia’s house prices are anything but sensible

Beware those "experts" telling you there's no housing bubble in Australia. There are similarities between the housing situation here and that of the US prior to the market's collapse, argues researcher Philip Soos.

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.


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30 thoughts on “Why Australia’s house prices are anything but sensible

  1. Andybob

    Australia, however, has historically had a much lower level of mortgage default than the USA. That is because in a lot of States in the USA (including California), a mortgagee does not have recourse against the borrower personally and can only obtain payment from sale of the house. People are much more likely to hand back the keys and abandon the property if they cannot be pursued for any shortfall on sale. In Australia the borrowers are on the hook personally and as a result, are much less likely to default even if there is no capital gain in sight.

  2. Hamis Hill

    OK, it is time to abandon the usual pseudo-sophisticated cynicism which normally greets warning articles such as Philip Soos so knowledgably offers.
    In response to a request in 1986 I wrote a similar article,( which appeared in Tertangala Aug 1986 (copy held in The Mitchell Library Sydney) titled Housing and The Economy), which exposed the conditions which led to the GFC.
    It was an unimportant amateur effort but the arguments seem to have held up since many of them appear in Philip’s article.
    The point being that the evidence has been out there for a substantial time, accumulating to the point where it can be no longer ignored.
    The “Greed leading to Panic” scenario (should Central Bankers ignore “Negative Sentiment” and tell the truth about the housing bubble) seems to be a key point of the article.
    “Greed” informs the voting intentions of those supporting the Coalition, surmising a return to a golden era which ignores the effect of the GFC and Philip’s report of an Australian Mortgage market which is 85% of GDP.
    A Coalition victory will ensure that Greed turns into Panic, for the collapse in the housing bubble will begin with the austerity policies of the Coaltion,( already started at the State level), contracting the economy into an Abbott Recession, just the same mechanism which Philip points out in the US prior to the GFC and delivered by the same side of politics.
    The Abbott recession we otherewise do not have to have should the central bankers wake up to the threats (that an incompetent and other-worldly Coalition of fringe minority parties would bring to a federal government), and encourage “busines” to withdaw financial support for this effective self-immolation of their own interests for shallow polical motives.
    If, however, we are now “multi-national” then there will be no shortage of foreign capital ready to pick up Australian assets at fire-sale “Recession” prices.
    It happened in the Great depression when Sydney’s prestigious Eastern Suburbs changed hands altogether.
    Another reason for the warnings to be ignored?
    The aftermath of the coming “Panic” will be conveniently blamed on the “worst government in Australia’s history”.
    It seems that the Coalition have already concurred with Philip’s arguments and “Gamed” the “recession we have to have” post the housing bubble burst.
    After all they are just a bunch of hack salespeople and they will be heavily employed selling their nation off in the Recession we really do not need to have, if the present administraion is given another three years to carefully deflate the housing bubble as they have already been doing “patriotically” for the length of the GFC.
    The facts are there, have been for a long time and only The “Mob” (as Howard cynically described his “Battlers”) kept in the dark. Greed leading to a panicked vote for Abbott?

  3. GF50

    @ hamis Hill

    You have absolutely nailed it, I can only cheer from the side lines. Forensic! 🙂

  4. Ginas new vajazzle

    One in three mortgages in Australia at the moment (or 4Q12) are serviced on an interest only basis. That would be courtesy of a generations worth of real estate investment roadshows telling people to do precisely that for the capital appreciation.

    Now if we factor in that a significant volume of housing is owned by babyboomers using it in lieu of a pension, and that the capital appreciation largely ended about 2 years ago then we are presumably reaching that point where slowly but surely there will be a trickle of people trying to find something else to do to earn themselves a return to pay. That then becomes a lot like e Mexican standoff, because the first to sell will get better prices, more certainty of selling and less end stress than those coming later.

    And TestosterTony Abbott is leading a government committed to a little bit of the old austerity.

    Sit back and relax. this is going to be a hoot.

  5. Stickey

    Housing is too expensive for middle Australia and, in particular for families on less than $60,000 income. Builders continue to erect mansion style houses on expensive land thus “pricing out” thye artificial market. Younger people are backing off buying a home and literally staying home with parents thus living in separate social conditions. Also they are not breeding.

  6. as

    There is no correlation with non-recourse loans and mortgage delinquencies. In the US the overwhelming majority of loans are recourse. Furthermore the two states with the highest amount of mortgage delinquencies, Nevada and Florida, are both recourse states.

    This whole non-recourse = greater mortgage delinquencies is a massive furphy.

  7. Peter Hannigan

    The Crikey approach to these housing articles is rather fun. Alternate a housing booster with a housing doomster – each using their cherry picked data to support their opinions. Still, it would be nice if we got an article occasionally that tried to take a neutral view of the data and the psychology behind the way Australians approach the housing market.

  8. floorer

    The three witches in Macbeth could knock out an article on housing in Oz and be as close as any economist.

  9. Steve777

    Time was a breadwinner on an average wage could afford to buy a modest home and support a home keeper partner and several children. Admittedly the homes were half the size of those built more recently and contained far less stuff. But I’ve often thought that much of the increase in prosperity over the last few decades has been illusory. High housing costs have simply absorbed so much of it. And housing prices are determined by those who can afford it treating housing as a speculative investment with tax advantages. It can’t last. And when it comes crashing down a lot of Australians will be badly hurt. It would be good if we could quarantine the impacts of the crash to the speculators.

  10. floorer

    “Time was a breadwinner”, indeed, now it takes two breadwinners and credit.

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