The coming Australian property crunch By Ben Eltham
Over the past two years, we’ve seen property bubbles burst across the rich world: in Spain, in Ireland, in the UK and of course most damagingly of all, in the United States. All of these markets saw classic asset price bubbles, with rising prices fuelling massive and unsustainable property booms, followed by equally painful crashes.
Yet real estate prices in Australia just keep on rising in defiance of both gravity and international example. It couldn’t happen here, could it?
Oh yes, it could. Last night on Lateline Business we saw noted contrarian Marc Faber injecting a welcome dose of pessimism into the usual froth that passes for business commentary on Australian TV. Apart from featuring hilarious dead-pan timing - make sure you watch the video and don’t just read the transcript - Faber’s interview is actually a very sobering assessment of the carnage that awaits an Australian real estate sector that seems to believe the good times will roll forever.
Marc Faber doesn’t think so:
ANDREW ROBERTSON: You think a downturn of US-style housing slump type proportions?
MARC FABER: Yes, could be larger.
ANDREW ROBERTSON: Could be larger?
MARC FABER: Yes, could be larger. Those of you thinking about buying a house would be well-placed to think about holding off for a few years.
That’s right, Faber thinks we could be in for a property bust worse than the current US real estate crisis. The economic fundamentals explain why: Australian households are massive indebted - “highly leveraged” as Faber says in the interview - and that leverage must inevitably be wound down. Indeed, Australian household debt-equity is at comparable levels to those seen in the US in 2006. The chorus of analysts claiming Australian house prices will continue to rise is simply more evidence: once everyone thinks an asset class can only go up, the seeds of the crash have been sewn.
Those who think, as a recent ANZ Housing Snapshot argued, that “Australian house prices have never fallen and going forward we believe that there will be no reason that they will,” may end up looking as silly as former Citibank CEO, Chuck “we’re still dancing” Prince.
No reason? What if Australian immigration slows down from its current record levels, removing some of the massive levels of short-term housing demand? What about a global recession causing a drop-off in Chinese demand for Australian resources? What if non-bank lenders keep having to increase their interest rates, as their own margins are squeezed? Indeed, what if growing numbers of Australian households simply fall over of their own accord, unable to pay for food and petrol and at the same time service their current debt levels? What if baby boomers start to sell their houses more quickly than first anticipated, in order to pay down their huge debt overhang? And what if inflation continues at its current high levels, eroding real wages and perhaps even forcing the RBA to raise interest rates again?
The biggest concern here is the simple observation that in overseas markets mentioned above, the property crash actually preceded falls in employment. The official US unemployment rate, for example, is still below 6%.
As Steve Keen pointed out in his seminal 2007 Centre for Policy Development paper Deeper in Debt, “when a credit bubble bursts, it, and not policy-makers, “decides” what form the bust takes.”
