Pleiades pointed me towards this last week and this week. Having read through the 2 installments I couldn't tell you which one was more frightening. Lets try a taste from the first week first:
While wages have risen, the 2.8 times increase in loan repayments means that mortgage payments on an average first home loan have gone from taking 40 per cent of after-tax income of the average worker in the 1990s to 64 per cent now – after reaching a peak of 74 per cent in late 2008 before the RBA slashed interest rates (the ratio fell to 53 per cent, and it would have fallen further had the first home vendors boost not caused house prices to skyrocket again).
In the early 1990s, a young wage earner could aspire to financing a house purchase using his or her income alone. Now, that’s out of the question.
Faced with this level of potential debt-servicing costs, young would-be house-buyers are giving up on the dream of home ownership – and its attendant nightmare of debt peonage. Recently there have been calls for a first home buyers' strike. A 'buyers’ strike', whether organised or not, is what will end the Ponzi scheme of debt-inflated house prices, because like all Ponzi schemes it only continues to work so long as new entrants outweigh those trying to cash out.
That's it in a nutshell. There are some interesting graphs that follow but the take home point of the first article is that yes, there's a bubble going on, and it's gettng to the point where the bubble can't be supported by the willing participation of the market. Cutting to the chase, the growth in mortgage debt is at once the secret of our banking sector's success. Here's the elaboration in the second article:
Looking back over past data there are several consistent patterns that can be seen.
Firstly, house prices and bank shares are correlated. There was one aberration – the 1970s – but that was marked by peculiar dynamics arising from the historically high inflation at the time. Generally, bank shares go up when house prices rise, and fall when the fall.
Partly, this is the general correlation of asset prices with each other, but partly also it’s the causal relationship between bank lending, house prices, and bank profits: banks make money by creating debt, rising mortgage debt causes house prices to rise, and rising house prices set off the Ponzi scheme that encourages more mortgage borrowing. The bubble bursts when the entry price to the Ponzi scheme becomes prohibitive, or when early entrants try to take their profits and run.
Secondly, the fall in the bank share price is normally very steep, and it occurs shortly after house prices have passed their peaks. Holding bank shares when house prices are falling is a good way to lose money – and conversely, if you get the timing right, betting against them can be profitable. That’s why Jeremy Grantham – and many other hedge fund managers from around the world – is paying close attention to Australian house prices.
Thirdly, house prices and bank shares are driven by rising debt, and when debt starts to fall, not only do house prices and bank shares fall, the economy also normally falls into a very deep recession or depression. This is the crucial role of deleveraging in causing economic downturns, including the serious ones where debt falls not just during a short cycle prior to another upward trend, but in an extended secular decline.
There is also one cautionary note about the current bubble: though history would imply that there is a very large downside to bank shares now, it’s also obvious that bank shares fell a great deal in 2007-09, so that much of the downside may already have been factored in.
It's well worth checking into those pages to have a good look at the graphs because they're very scary. The graphs bear very close inspection. The numbers clearly tell us we're in one big mighty property bubble. The rest of what is said to describe it is window-dressing.
I'm wondering how all this leveraging into mortgages is going to get de-leveraged when we fully switch into the 2speed economy where miners will boom and drive inflation while the rest of the economy gets taken for a ride. There's some pain up ahead if you aren't somehow hooked into the mining sector, and if your career's all about finance and banking, then you may well be in for a mighty wallop when the bubble bursts. It's going to be the Australian financial crisis. We're going to hate every bit of it, just as people in the rest of the developed world are hating their post-GFC medicine right now.
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