So Which Is It?

The Banks Say There's No Bubble

This is getting to be like a game.
The banks believe, or at least want us to believe that there is no bubble going on in the Australian property market.

Testifying at the parliamentary inquiry into banking this week, the chief executives of National Australia Bank, Westpac and Commonwealth Bank all said that while they are worried about elements of the housing market, prices aren't over-inflated.

"I would draw the distinction between a speculative bubble in prices and prices beyond what fundamentals would justify," Westpac's Brian Hartzer told the parliamentary committee on Wednesday. A bubble isn't occurring in Sydney or Melbourne, where house prices have risen the most, he said.

"There are increasing risks, but I still believe the answer is no," National Australia Bank's Andrew Thorburn said when asked if houses in Sydney and Melbourne are overpriced.
Commonwealth Bank, which is the nation's largest mortgage lender, is seeing "lending at levels we are comfortable with" across Australia, Chief Executive Officer Ian Narev told the committee when he testified on Tuesday.

Funnily enough that reminds me of the scene in 'The Big Short' where a market bull tells Steve Carrell's character that he's going to buy more shares in a bank that is about to get smashed. If history is any guide, it's going to look perfectly fine until the moment it isn't.

John Hewson Says The Risks Are Greater Than The GFC

Former Opposition Leader and famous driver of Ferraris as well as a note economics academic John Hewson thinks there is a problem. He closes his column like this:

However, our whole system is at risk of a significant drop in house prices as, indeed, was the US/global financial system in the run up to the global financial crisis, where the mountain of debt was built on a US sub-prime housing loan, which was simply a punt on house prices not falling. 

Our banks are, today, heavily exposed, having become essentially building societies that also issue credit cards. These exposures are over and above their considerable climate exposures – not just to mortgages on coastal properties, and to fossil fuels, but more broadly. 

The risks being run actually dwarf those of the GFC. If it goes bad, the government will be called on to intervene.

I imagine John Hewson's kids have grown up and suddenly he's had to have a closer look at this housing affordability for his kids. That must have led him to believe there is a problem brewing. Certainly the OECD's warning wouldn't be falling on deaf ears with him. 

What The OECD Thinks Of All This

The OECD were pretty rosy aboutAustralia except this property bubble thing. 

The survey says in real terms house prices have climbed to 250 per cent their level in the 1990s, with much of the increase taking place in the past few years, "straining affordability, especially for first-time buyers in Sydney". 

"A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy," it warns. 

(edit)

Sydney house prices climbed another 4.5 per cent in the three months to February to be up 18.4 per cent over the year. Melbourne prices climbed 5.5 per cent to be up 13.1 per cent. Australia's ratio of household debt to GDP has climbed to 123 per cent, an all-time high and the third-highest in the world. 

The OECD report argues that it is mainly local investors and owner-occupiers, rather than foreign buyers, that are pushing prices high. It says the markets are vulnerable to a sudden rush for the doors should prices start to falter and investors believe capital gains are no longer to be certain.

I was talking to an old friend who said to me he had $400k to put towards a house. He could get a loan for $400k. If his spouse does the same, it comes roughly to about $1.6m which is the price of a house in Sydney, with nothing left over. There's no money for innovation or investing in other things. 

It's astronomical money for a house in Sydney when you consider what you can get for that money in other parts of the world. As we were driving around the inner city, he pointed to arrow of tiny workers' cottages and said they were all going for well over a million. He's probably right because he's been looking. I told him "it's not really sustainable, given how low wages growth are and how more and more people are getting forced out of full time employment." 

"So it has to all end in tears, right?" he asked. 

The rational part of my thinking says absolutely. But then I've been writing that for like a decade now and it keeps going on, so maybe those banks are right. And yetI can't help but think of 'The Big Short' and just how much people must be stretched to take out million dollar mortgages. The economy's growth is sluggish because any amount of discretionary spending goes towards paying off the mortgage, so effectively the low interest rate thing doesn't help the consumer one bit. It only helps baks that get to make out the silly-money loans.