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Bankers blowing bubbles

26/09/2013

Today the ANZ bank chief economist announced that talk of an Australian housing market bubble was misinformed. He claimed that the recent rapid increase in house prices in capital cities was due to population increase adding to demand. He says there is currently a shortage of 270,000 houses in the country and within a year there will be a shortage of 350,000.

So if there wasn’t a housing bubble before, there will be now.

There has not been an unprecedented increase in Australia’s population in the past few months, though population growth is still higher than it was a decade ago as the country rushes towards environmental, resource and infrastructure unsustainability.

His estimates of the house shortage could be correct though. For a long time most of the activity on the housing market has been speculative rather than venture. Much building is actually renovation as double-income-no-kids couples buy up practical, compact small family homes and renovate them into two person McMansions with lots of entertainment and car space but little garden area and often fewer bedrooms that was originally the case even though floorspace has been increased.

Australia’s capital cities have pretty much reached their limits of urban sprawl and decentralisation programs are now a thing of the past with governments failing to invest in regional infrastructure and employment shifting from suburban secondary industry to the urban services sector.

All of those factors contribute to demand for housing in Australia’s capital cities. But demand for living space isn’t the driver of housing prices. Prices are investment driven. Speculative. A bubble. And they have been for decades.

Since the 1950s Australia has had a culture of home ownership. Originally part of the post war suburban dream of a place to settle down and raise your children, by the 1970s – after decades of steadily increasing prices caused by post war immigration and the baby boom – the dream became one of investment. Most of my birth cohort were not building houses to settle down and raise kids in, but to borrow against to build another house. Then the first house was sold for a profit in the booming market and the process repeated with ever more expensive houses.

By the time all the baby boomers had started their careers so many Australians were building houses the market should have flooded and collapsed. But all those people with large debt exposures covered by the value of their homes were also voters. The government began tweaking the tax system to ensure there was still an incentive to enter the housing market. The housing bubble began. And it hasn’t stopped inflating since.

Successive governments and reserve bank boards kept introducing market distortions to placate the important vote bank now referred to as ‘the mortgage belt’. Australia could no longer afford to let houses find their natural price level in a supply and demand market. To do so would have bankrupted vast numbers of indebted consumers as the adjusted value of their house fell below the mortgage debt they had taken out against it. All the forced sales would have pushed the market even lower in a manner akin to what happened across much of the developed world during the Global Financial Crisis. But because so much Australian private debt was covered by mortgages it would have had an even more catastrophic effect on our economy than it did in the US.

The measure of the economic competence of Australian governments became how low the interest rate is, so how much of their income indebted mortgage-belters can still use to drive consumer spending. Assets are sold and infrastructure investment neglected in order to reduce government debt and put downwards pressure on mortgage rates. Policies aimed at keeping interest rates artificially low redistribute wealth from savers to debtors, encouraging even more people to go into debt and impoverishing those living off their savings or fixed incomes. Methods of measuring inflation are regularly tweaked to hide stimulus based inflation, justifying the reserve bank policy to keep lowering interest rates. Fewer people settle in infrastructure starved regional areas and urban and suburban density increases, pushing house prices even higher. Venture capital investment in industry is largely ignored by economic commentators in favour of the house price index and new housing starts. House prices keep increasing and the bubble keeps growing.

Australia has been blowing an unsustainable housing bubble for over thirty years now. The more it is inflated the less any government can afford to let it burst.

But burst it must.

Prices are now so high the Australian dream of home ownership will remain nothing but a dream for an increasing proportion of Australians. More young adults are living with their parents because normal starting wages for even well educated Australians can barely cover rents, much less a home deposit and mortgage. Increasingly the only people who can afford to play the housing market are people already in the housing market. Increasing population is not leading to a corresponding increase in new housing because potential new owner-builders can no longer afford to build them.

Politicians and bankers will continue to talk up the Australian housing bubble while continuing to deny it exists. They have little choice. But the longer they are successful the further the market will have to fall when they inevitably fail.

When the housing bubble finally bursts it will be an explosion that will take much of the Australian economy with it.

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From → economics, politics

2 Comments
  1. Rex permalink

    “Policies aimed at keeping interest rates artificially low redistribute wealth from savers to debtors, encouraging even more people to go into debt and impoverishing those living off their savings or fixed incomes.”

    Absolutely true!

    Apart from this, I detest the idea of money making money which is not just dumb but dangerous too. (The dumb are always the dangerous too perhaps!) Banking and real esate are fertile grounds for the proliferation of this cancerous idea. The true philosophy of money as a representative force is to afford well being to all citizens through a thoughtful exchange of resources, without the need of robbing someone of it. This is why money is in circulation in first place. But money is more representative of power and not wellbeing. And the easiest way to this power is to be an adept at legalised thuggery. Ditch the world, be a thug, encourage thuggery thereby, and all will be good because in this equation there will always be more nincompoops than clever losers. Clever losers think and write about money, they can’t make money. Lol.

    Like

  2. Hmm…Sounds like the US not too long ago…

    Like

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