Air leaks from the Australian housing bubble

Over the past 25 years, Australian house prices have risen around sixfold, compared to a fourfold rise in British prices between 1986 and 2007. While many countries have seen their housing markets slump, in Australia prices have barely slid at all.

The Economist calculates that the ratio of prices to rents is 57% above its long-term average. Economist Steve Keen estimates that the value of the average first mortgage has jumped almost fourfold since 1992. What’s more, mortgage payments on an average first-home loan account for 64% of after-tax income for the average earner, up from 40% in the 1990s.

All this points to a housing bubble that has yet to pop. But air is beginning to leak out. As Nicola Saminather points out on Bloomberg.com, house prices slid by 1.7% in the three months to March, the worst slide since the third quarter of 2008. Back then, the central bank slashed interest rates and the government enticed first-time buyers into the market with incentives. But these have ended and interest rates have since “normalised”, says JPMorgan’s Ben Jarman. Now first-time buyers are “all but absent” from the market.

Conditions won’t get any easier for housing. “More rate hikes are only a matter of time”, given how little spare capacity there is in the economy and the recent rise in core inflation, says Capital Economics. That implies less lending and hence less fuel for the housing bubble, which, as elsewhere, has been based on debt.

Mortgage debt as a percentage of GDP has risen sevenfold in 20 years, notes Keen. Banks’ exposure to housing is at a record high, accounting for 57% of all advances on Australian banks’ balance sheets.

So the danger is that rather than dodging the housing, credit and banking turmoil that engulfed much of the world two years ago, Australia merely put it off.

  • Will

    Merryn. Steve Keen’s a decent starting place but his mate Bill Mitchell’s even better.

    There is a limit to how much debt the private sector can finance combine that with higher interest rates and a government intent on reducing the deficit money is going to be sucked out of the private sector at a bust inducing rate.

    Note there’s plenty of spare capacity with total unemployment at 12% and Australian basic unemployment is at 25% even higher than our shocking 20%…so much for investing in future generations.

  • Margaret

    What an ambigious article?
    “Over the past 25 years, Australian house prices have risen around sixfold, ..”. And then it points out…”house prices slid by 1.7% in the three months to March, the worst slide since the third quarter of 2008″. 1.7% to 6 fold increase in price, is that the “worst slide”, the overall outcome is still positive, right?
    And I am not sure also where the 25% unemployment statistics eventuated from as they are totally inaccurate.
    Every asset class corrects, especially after such massive increase, however if the fundaments and economy are running efficiently, then the outcome over long term should be positive.
    Since when was the realestate thought of as a short term, static investment? I was always told it should be for at least 10 years.
    However, most people nowadays, wish for super fast, super exciting investments. Well, property is just the opposite, super slow and super boring and thank goodness for that.

  • Brett

    Unemployment in Australia is between 4% and 5% with some sectors suffering skills shortages and the government funding a large re-training programme being offered to all. Not 25%
    So, more by luck than judgement the Aussies are investing in a mining for future generations but not in high end manufacturing which is a shame for a resource rich country like this which will run out of resources and then what do they do? Invest in the service sector like the UK? No it doesn’t work as the UK is finding out very quickly.
    Australia was lucky to have a surplus when the GFC hit but soon wasted it on handouts to all and nothing to show for all that money spent. They still need to invest in the infrastructure and up their game after getting the deficit paid off by 2015. They are better placed than most other OECD countries as they are tied to the Asia/China markets and not so much reliant on Europe and US which are both in for a hard time over the next few years.

  • Margaret

    Well said Brett.
    If Australia runs out of resources than I’m sure the rest of the world will too. My husband ex-geologist assures me of that.
    I suppose so far Australia has been slightly immune but it does rely on China vastly. So we are heading for intersting times ahead, I think….we may be safe for the next few years ahead and then we’ll see.
    I am so glad, at least for now, to my father, for making a permanent move, from Eastern Europe to Australia….

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