The Problem That Allegedly Isn't

It's Not A Bubble, It's Just Elevated

Ever since the RBA and its board started talking about housing as potential bubble, there's been increased discussion in the press about what to do about it. As in, if there might happen to be a bubble developing, maybe we should be doing ... (fill in the blank).

Yesterday it was the eminently despicable Paul Sheehan pointing to China and its dodgy dealings ending up as investment money in Australia as the culprit.  Today it is Saul Eslake saying it's the negative gearing that's pushing up prices because it over-incentivises property investors.

It's interesting that the tenor of the discussion has moved towards saying that these elevated house prices might lead to a bubble, as opposed to flatly denying there is a bubble going on. Like a lot of big economic problems, the phenomenon is too big to be seen in small samples because all small samples can be dismissed as anecdotal. That's essentially what's happened to date in claiming there is no bubble going on.

All the same, the mountain of private debt is making things in the economy a lot more constrained. It's a worldwide phenomenon as far as the developed world is concerned, in as much as there is all this investment money that has to go somewhere, and if investing in tech or energy or mining or manufacturing is too hard, people would just prefer to put it into Real Estate and collect the rent as they pay a mortgage. The problem is, when everybody has decided that all these other investment possibilities are no good and property is the only place to be, then it is that classic definition of inflation where too much money is chasing too few assets.

We live in strange times for many reasons, not least of which is that the last global financial crisis was triggered by the sub-prime mortgage market going bust. In other words, the real-estate market killed banking as we knew it; Since then, banks have had to shore up their bottom lines and businesses have had to cut spending to pay down debt. The net result of all this cutting turns out to be a massive loss of confidence in industry and therefore Capitalism. Subsequently a flood of money has gone into residential property. Prices remain elevated in the UK as well as Canada, and in the USA prices are creeping back up to pre-GFC highs. It's not as if Australia is wildly out of line with those places - and so maybe unaffordably high property prices is part and parcel of the 'new normal'?

It's actually a funny moment if you think bout it. The Central Banks of the world have been busy printing money to prop up asset prices. They've well and truly succeeded, in that there is a worldwide housing bubble. So much of the printed money ended up as even more debt taken out by investors to speculate on property because the rest of capitalism has simply lost its lustre, and lost its credibility. If anything this all represents a great no-confidence vote in the Central Banks. It's a bit like a Moebius strip that way. You start out thinking along side with the RBA and you end up realising that there *is* a bubble, but when you go further along the strip you come back to the point where you realise that we only have a bubble when compared to historic norms. These, simply are not normal times.