Pleiades put me onto this one after I wrote about the demographic wave last week. It's not popular to say this, but Steven Ken keeps telling us we're in a property bubble in Australia. The argument against it is that because supply is constrained, it shouldn't burst any time soon. Still, if you can be bothered to sign up at Business Spectator, there's this article here. This bit caught y eye:
This is not a new phenomenon: though I apportion most blame for the Australian house price bubble to the finance sector, there’s little doubt that the fuse itself was lit by the government’s interventions via the First Home Owners Scheme, which began in 1983.
This scheme has always been used as a means to stimulate the economy, and it’s worked – but in much the same way that an anabolic steroid will help an athlete win a medal: it pumps up the performance at the event, only to leave the athlete with long-term health problems in the future.
From 1951 until the FHOS was introduced in 1983, the average quarterly increase in house prices was 0.07 per cent – which is statistically indistinguishable from zero, given that the standard deviation was 1.73 per cent.
After the scheme was introduced, the average quarterly growth increased by more than a factor of ten to 0.94 per cent, and the volatility rose as well. Since there have also been periods where the scheme was removed and when it was doubled, it’s possible to drill down further on its impact – and it’s bleedingly obvious that it both increased house prices and their volatility.
The graphs don't paint a pretty picture. Steven Keen then gos on to show that demographics don't mean much, it's the amount of debt that's been taken out that has directly pushed up prices - which of course is the working definition of a bubble. In any case, it's clear that both Sydney and Melbourne are over priced by historic standards and people are peddling all kinds of arguments as to how this is okay.
What's interesting in all of this is that the RBA hasn't raised interest rates since the Melbourne Cup. The last 2 occasions it was mooted, the rates ended up staying the same. It is a distinct possibility that the RBA wants to raise it to combat the inflation generated by the booming mining sector, and yet it can't because it knows that households are stretched out so far with mortgages than any more rate rise could bring down the house of cards. The repeated claims of a two speed economy do seem to be true when you look at just how over-priced property in Australia has become.
The flip-side of all this is that we can only read from this that governments of both sides of politics think the last thing they want is a property price correction. To that end they will support/inflate the property market with these grants and allowing foreign investors to come in. That suggests the property sector has something in common with the banking sector in that the government has deemed it as too large to fail. There are too many vested interests who make a direct political contribution to both major sides of politics. The best news then may be that there won't be a bursting bubble, but a slowly deflating asset class. The worst news is that if you're a have-not right now, you'll likely stay that way for a very long time.
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