I came across an article in Macrobusiness discussing how overvalued Australian property is. The short answer is: It's very overvalued. The article is for subscribers only so I will quote a small section here: As shown in the chart below, the total value of Australia’s residential dwelling stock owned by households was just over 3.1 times GDP as at September 2014, versus only 2.85 times GDP in June 2003:
This means, as a percentage of GDP, current dwelling values are higher than in the previous boom. And the previous boom was huge in comparison to history:
Ignore the talking heads that say Australian property is not overvalued. It's massively overvalued and sitting on pillows of private debt (see red dotted line):
The issue with massive private debt is that rising unemployment crimps incomes, which means that debt cannot be repaid. At some point, total credit growth will go into reverse, destroying money in the process, which means a decimation of house prices.
The RBA must prop up housing values with lower and lower interest rates. However, in doing so, they are pricing out first homebuyers whilst advantaging asset holders. Will Gen X, Ys and millennials put up with it? I doubt they will. Get set for increased industrial action and political lobbying for:
Asset testing the home for the age pension;
Reform to negative gearing (delayed: Joe Hockey owns 4, Nick Xenophon 8: see here);
Further crackdowns on foreign purchases of Australian property (happening);
Further crackdowns on SMSFs purchasing Australian property (happening).Don't be deceived into thinking that our economy is sufficiently diverse and can handle the adjustments that are about to take place. Dr Nahan, the WA Treasurer, is purposely painting a pretty picture so that people continue to borrow money and buy houses.Moreover, China is going through the same process. They have barely started to adjust. I would even say they have not actually adjusted. Why? Because their economy is still massively over investing in fixed assets as at 2015. They've only managed to reduce the level of overinvestment in fixed assets from over 20% GDP growth to 15% GDP growth. Fixed asset investment growth in China should ideally be 0% growth or even negative:
Summary: The Australian economy is not a robust animal. It's actually a big domino setup. One sector of the economy affects the rest of the economy.
Why? Because a massive chunk of the Australian economy is based on services including finance and banking, which has been fuelled by credit growth. And this credit growth was fuelled by income growth from the mining sector. With major income cuts in the mining sector taking place, the large increases in credit growth over the past 22 years cannot continue.
We are only seeing the very start of the structural changes taking place in Australia. The impact of spending cuts in the mining sector are just now starting to be felt.
