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Astute Crikey readers would have noticed that I haven’t written an article about the overpriced Australian property market for some time. This was because it seemed like I was the only person at a rave who wasn’t on ecstasy. Well, the rave is still going strong, and the banks, with a little help from the government, are still dealing.

On the weekend I popped around the corner to see an auction of a nicely kept property in Albert Park, Melbourne. The three-bedroom, one-bathroom residence had some nice touches (wine cellar, cinema room, garage stacker) but was relatively small and in a second-tier street. Half an hour later the property had been knocked down for $3.755 million. The buyer was a cocky-looking 35-year-old with slightly bleached hair — he looked more in place shopping for surfboards than multimillion-dollar inner-suburban properties. Such is the state of the current property market, after the hammer went down, the couple next to me were congratulating the buyer on his purchase. “Good on him,” they quietly noted.

It is truly a bizarre situation when a 35-year-old can pay 50 times the annual rental for a property and be congratulated by onlookers for his foresight.

How have we reached this absurd point?

The main driver of housing prices remains the taxpayer-backed big four banks, whose balance sheets are so overloaded with housing debt that they have no choice but to keep the charade going as long as possible. Bank executives are paid based on profitability and shareholder return — short-term profitability, that is. The fact that a chunk of the loans being made are based on prices that bear no real semblance to a discounted cash flow valuation is seemingly unimportant. Eventually the music will stop, but by then, bank CEOs will have been paid $50 million and the clueless directors who allowed it all will be frantically checking the terms of the indemnity insurance.

House prices are no longer a function of value but rather of how much people are prepared to pay. That in turn is determined by how much banks are willing to lend. And that amount continues to rise. Before the current boom started in 1997, the ratio of household debt to GDP was around 40% — it’s now more than 100 percent (it’s the same story for household income to household debt). In short, the banks are lending Australians a whole load of cash, and we’re using that cash to bid up the price of an unproductive asset (established housing).

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The removal of housing prices from reality is almost total. Most investment advisers will tell you that the price of an asset is dependent on the income that asset generates. For example, the more a company earns (or more specifically, the more investors think that company will earn in the future), the higher its share price will rise. Given house and apartment prices are currently high (based on their terrible net rental yield) one would expect rents to be increasing significantly to justify their price.

However, the data tells a very different story.

CoreLogic found that Australian dwellings increased in price by 10 percent in the past year. In Sydney and Melbourne the price rises were even more significant, with Sydney increasing by 13% and Melbourne by 13.9%. If the market had any degree of rationality, given the market is already expensive, rentals would have needed to rise by around 20% during the year to justify those price increases. However, CoreLogic also  reported that Sydney rents were up a mere 0.4% and Melbourne up by 1.7% (both well below the inflation rate).

That means if the market was insane a year ago, it’s even worse now. Already overprice property is increasing, in Sydney’s case, 20 times as fast as underlying income.

The problem is no one seems to care what the banks do (least of all the government, even though taxpayers are on the hook if any of the big banks fall over, which if the history of banking is anything to go by is a virtual certainty at some point). Moreover, successive governments’ taxation policies (negative gearing, no capital gains tax, minimal land tax) serve to exacerbate the insanity.

How long will the boom last? Potentially some time. There are a lot of vested interests (banks, real estate industry, state governments, the media) who are utterly reliant on the bubble continuing. Sadly, a couple of generations of Australians will be all the poorer for it.

* Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed and was CEO Magazine’s 2015, Young CEO of the Year

Peter Fray

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