Property bubble continues: but how will the asset boom play out?

While the residential property bubble continues in earnest, the mainstream media is beginning to take divergent views in how the asset boom will play out. The Fairfax papers last week appeared to exhibit a more sombre tone, led by Tim Colebatch, who produced a chilling and percipient warning of the dangers of increased debt. This realism was contrasted by a less impressive piece of newspaper writing in the Daily Telegraph, which predicted that “up to half of Sydney homeowners are set to become property millionaires, with house prices predicted to double in the next decade”.

According to figures prepared “exclusively for The Sunday Telegraph by Australian Property Monitors”, it was alleged that Sydney’s median property price will grow at 7.6% per year (the fact that APM, which is owned by Fairfax was providing exclusive data to Fairfax’s main rival is somewhat baffling, although given the quality of the data, perhaps the joke was on the Tele). The ever-helpful John Symond, who makes money from selling loans to house buyers observed that “young people should try to buy now while it’s still reasonably affordable. They shouldn’t over-commit themselves and will need to hold on to the property long term”. Geez, great advice “Aussie” John, perhaps young people should also have a dozen stubbies before going on a road trip as well.

Exactly how APM compiled its forecast wasn’t disclosed by the Tele, but the data provider noted that “wages in NSW are currently growing at 5.4% per annum”. It shouldn’t take an especially astute reader to realise that APM predicted that property prices will rise at a 40% higher rate than incomes. Exactly how this could possibly occur wasn’t disclosed, although perhaps APM was relying on the mythical shortage, or the continued influx of Chinese buyers.  Or most likely, like most other property “experts”, they simply used the average of past years to determine what property prices will do in the next decade. (The fact that property prices compared to disposable household incomes are double the historical average did not appear to concern APM, nor did the fact that Australia’s mortgage debt to GDP has increase from 15% in 1980 to almost 180% today).

A graphical representation of Australia’s house price boom was produced by the brilliant Steve Keen, indicates just how strongly Australia’s property market has risen compared with the US and Japan:

Source: Steve Keen’s Debtwatch

The lack of clarity exhibited by property investors was well outlined by Adele Ferguson in the Fairfax papers last week. Ferguson reported the findings of a Fairfax and Colmar Brunton study, which revealed “32% [of respondents’ could see [the property boom,] running another year, 44% for two or more years, and 7% forever”. Presumably 7% of respondents to the survey are real estate agents.

Even worse, such is the foolishness of federal government policy that “42% [of people are] expecting the federal government to introduce another round of first home buyer grants if the present boom shows signs of ending”.

It is difficult to tell which act of Kevin Rudd and Wayne Swan was more destructive to Australia’s economy — the imbecilic decision to introduce the First Home Buyer’s Grant (which led to a rapid increase of prices received by vendors and by the looks of it, an asset class, which, according to 42 percent of people, is “too big to fail”) or the bizarre relaxation foreign ownership rules. The latter had the effect of enticing billions of dollars of Chinese money into the housing market, locking out Australians from buying property.

The federal government should be doing all it can to ensure that housing remains affordable and more importantly, closely related to its intrinsic value. Otherwise, valuable capital is diverted to an asset that contributes little to the economy once built. Of course, the last thing a poll-driven politician such as Rudd would dream of doing in an election year would be taking a long-term decision to correct the structural imbalance in Australia’s economy by say, restricting negative gearing or altering the capital gains tax regime.

While the Reserve Bank appears slightly more concerned about Australia’s property bubble, even the central bank is only slowly moving to increase interest rates from historical lows, largely due to the legitimate fear that a double-dip worldwide recession would be made all the more catastrophic by a tight local monetary policy.

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.