The recent talk on property bubbles in our capital cities has been getting more intense. Housing affordability is becoming one of those bugbear stories in the news every week as politicians and vested interests try to talk it down. Of course when the Treasury Secretary and RBA boss say Sydney prices are crazy and there's definitely a bubble going on, it's the-Emperor-has-no-clothes moment of perspicacity for most of us. There is an elephant in the discussion room - and so now people are talking about it fairly openly.
"Contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record. Policymakers are caught between a rock and a hard place, as implementing needed reforms will likely burst the bubble," Mr David and Mr Soos state in a submission on behalf of real estate and financial services research house LF Economics.
They believe the current bubble is worse than those in the 1880s, 1920s, mid-1970s and late 1980s.
"Australian economic history and recent international events illustrate collapsing housing bubbles can quickly increase the number of unsold properties [stale stock], shattering the pervasive myth of a deleterious dwelling shortage," they wrote.
"Falling housing and rental prices, including sales, would be a doomsday trifecta for investors as they suffer losses in both capital prices and net rental incomes.
"This calamitous outcome is especially likely in Melbourne where rents have not increased in real terms since 2010. Melbourne is primed to become the epicentre of a legendary housing market crash due to the combination of a staggering boom in real housing prices [178 per cent]. Perth is also in a serious predicament.
"Housing prices across all capital cities remain grossly inflated relative to rents, income, inflation and GDP. What event or set of events triggers the beginning of the end of the housing bubble is not yet known. A bloodbath in the housing market, however, appears a near certainty due to the magnitude of falls required for housing prices to again reflect economic fundamentals."
'Bloodbath' sounds a touch apocalyptic. These two gents think the officials have underestimated the coming collapse, and that there's so much speculative money in the property sector it's going to blow up with a bang. It's curious there is now such drastic talk. Back in the days shortly after the US subprime burst, there was much talk that Australia was somehow different, and that narrative has prevailed for years. The only person to point out that private sector debt was the problem indicator was Dr. Stephen Keen and he of course lost his bet. He of course lost his bet because the Rudd government guaranteed the banks and spent up big on the stimulus when it mattered; but what that did was merely kick the can down thread indefinitely.
Since then the political landscape has changed around the bubble, and now we have an idiotic government that can't seem to distinguish between government/public sector debt and private sector debt. The Federal government under Tony Abbot is furiously (or languidly depending upon to whom you speak) trying to rein in the deficit in the hopes controlling Australia's debt levels, but of course that's not where the problem debts reside. The colossal ballooning of Australia's debt is in the private sector, and much of it is tied up in property. Yet that is all by the by.
The way this government will go will be no different to other governments in history that faced down a bubble and lost. They won't do anything to remove the laws that are encouraging it - like negative gearing and capital gains tax breaks; and they will go lockstep with the vested interest groups who are denying it is there because it is better to keep ushering in the greater fool to keep buying their wares at inflated prices on money loaned by banks. This happens because all the vested parties want to keep their vested interests and bake it in to the pricing. And of course MPs are rarely renters or outside the property market, so they're not exactly incentivised to do the right thing.
I will share an anecdote from Tokyo just to give you a picture. For five years leading up to the Bubble bursting in Tokyo, housing affordability was the hot topic every day. The newspapers reported, statistical analyses were tabled, developers and real estate agents denied it, politicians acknowledged it, and yet no policies or laws were passed to ameliorate the factors causing the Bubble to inflate. Valuations went through the roof and people felt so threatened by the pace of the rise, they hocked themselves to the eyeballs to get into the market. Once it burst, everybody with an unrealistic mortgage was wiped right out - and naturally that was a significant portion of the market, who hadn't seen it coming. Prices collapsed to a fraction of peak valuations, and Tokyo housing has been at historic norms and trends for 25years since.
Not many people want to hear about it, but there is life after the bubble bursts. It's better to admit it's a bubble and make plans rather than deny it's there and get wiped out.
Grexit - The Revenge
Michael Pascoe thinks the potential Grexit is no big deal. He may even be right except the greatest creditor bank in all this is Deutsche Bank. And DB has 50trillion dollars worth of derivatives tied to the Greek Bonds. I don't know if people have been able to get out of those positions, but last I looked into it over at Zero Hedge, Deutsche Bank was the primary candidate to blow up when Greece defaults. So as the can keeps getting kicked down the road for Greece and its debt, it occurs to me that they - as in the IMF, ECB and EC - are going to have to invent a new narrative to keep giving the Greeks money to pay themselves back lest Deutsche Bank goes up in smoke.
Greece and her leaders at this point probably don't care. They've put yet another final final final proposal to the Troika, but it's probably not going to go far enough in concessions. This austerity business not only doesn't work, it's creating a lot of unnecessary pain for the person on the street in Greece as well as shrinking their economy. So you sort of wonder why the Troika keep on insisting on the fiction that somehow cutting pensions and services in Greece is somehow going to grow the Greek economy to be able to pay back the debt. At this point in time, everybody needs to come up with a better way to kick the can down the road.
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