Australian economist warns of bubble in nation's housing

[cory777]

Source: WSJ

Feb. 16, 2010, 1:11 a.m. EST
By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) -- Australia's seemingly bulletproof economy could soon face fallout from high debt levels and purportedly misguided policies designed to pump up asset prices, according to an outspoken skeptic of the nation's housing boom.

Economist Steve Keen of the University of Western Sydney, who claims to have accurately foreseen the global financial crisis, said he's been dismayed by what he sees as a growing nationwide housing bubble stoked by government efforts to forestall economic pain.

Keen points to a first-time homebuyer subsidy program, various other stimulus programs, and a 4-percentage-point reduction in interest rates -- policies introduced in the wake of the 2008 crash and which he termed "The Boost" -- as having helped fueled a new housing boom and a 6% rise in mortgage debt last year.

"The Boost has ... given Australia a dubious distinction when compared to the rest of the OECD. Yes, we are the only country that avoided a technical recession; but we are also the only country where debt levels are rising once more compared to GDP, rather than falling," Keen wrote in comments posted on his Web site, keenwalk.com.au.

He now believes Australian home prices could mimic Japan's decades-long slump, where prices have drifted 40% lower from their highs in the early 1990s.


Read more: http://www.marketwatch.com/story/australian-economist-warns-of-housing-bubble-2010-02-16?siteid=rss&rss=1

[MrModerate]

1. One can argue about the unwisdom of taking on debt when the rest of the world . . .

Is still shuddering through economic dislocation, but Australia's steady housing appreciation is due largely to the fact that there's a substantial shortage of housing (rapidly growing population, fueled both by birth and immigration); home ownership is as much a part of the Australian Dream as it is of the American; the aforementioned first-time homebuyer subsidy; and that rates have been attractive because the banks pushed them to historical lows in response to the GFC.

An interesting fact of Australian lending practice is that 30-year fixed rate mortgages are unheard of. If you can get your rate fixed for 3 years, you count yourself lucky. Housing loan rates are variable, and they generally go up. The early payment penalty for a ~$300,000 loan can be $20,000-$40,000.

Even so, home ownership often means a lower monthly payment than renting. In the small city where I live (Brisbane), a "nice" house (but no mansion, I can assure you) costs AUD 650-700 a week to rent (yes, a week). That's about USD 620-680, or somewhere around $2600 a month.

A bubble may be forming, but it hasn't yet -- and demand will keep housing prices high for the foreseeable future. Not to mention that Australia has mass quantities of highly desirable commodities (coal, LNG, iron ore, bauxite, uranium ore, etc., etc.) which -- while vulnerable to temblors in world markets -- generally recover on the leading edge of anyone else's economic recovery.

Short answer? I don't know anyone who's very keen on Mr. Keen.

[dixiegrrrrl]

2. Very interesting information.

Buying a house for the average wage person in Australia sounds tricky.
Esp. in these times of uncertainty.

So won't people buying now and in near future risk being caught in rising interest rates?
Or is Australia free of Goldman Sachs types?

[MrModerate]

3. It is tough for the average sheila and 'er bloke to buy a house . . .

However, they've got a few things going for them. First off, service jobs that don't pay diddly in America actually pay a living wage -- I'm talking waitresses, security guards, junior clerks, retail salespeople, etc., etc. And skilled craft workers ("tradies" in local lingo) earn quite good money -- roughly equal to small-company middle managers in the US. Those willing to work in mining (in terrible places in the Outback) can make upwards of $150,000/year for only moderately skilled positions (driver, f'rinstance). Young couples can stay at parents' houses longer than is usual in the US and save for a house. There is also a substantial first-time buyer subsidy (which keeps changing, but last I heard was about $12,000) which makes a nice down payment.

But an entry-level house in Brisbane (meaning two bedrooms, 1 bath, living room, kitchen, rumpus room, porch, carport, and a bit of yard, constructed circa 1950 in an OK but not fashionable neighborhood) is about $300,000. A condo closer to the city center (but not in it) would be maybe $250,000. And everything else is expensive too -- a new economy car $25,000, gas $6-8/gallon (sold in liters, of course), a dinner for two at an undistinguished restaurant $75, a bottle of cheap red $10, etc., etc.

With regard to rising interest rates, yes, homeowners get hammered. But over the last 15 years or so (just like in the States), rates have been pretty low, so the memory of real suffering is in the past. And while the banks have much more clout than their equivalents in the States (they push the central bank around shamelessly, and don't necessarily follow the funds rate set by the government), they are subject to public opinion, which can be very loud.

In fact, public opinion on just about everything is loud, although it's not nearly as mean in the States. Just kinda boisterous.

It's a tradeoff, and it's also true that the affordability index is dropping, especially since the housing market started to recover about 4 or 5 months ago. On the whole, it is easier for the general run of folks to buy here compared to the other places I've lived in the States in the last 20 years.

[WriteDown]

7. "Young couples can stay at parents' houses longer than is usual in the US and save for a house."

I shudder at the thought! My cousin lived with his mother and father until he was 27. He was working on Wall Street by that time and his mother still ironed his shirts. He finally got married and moved with his new bride....to his mother-in-law's house.

[MrModerate]

10. Not a pretty picture, admittedly. But if it's normative, then there are better coping mechanisms.

What strikes me as different is that in the US, while stay-at-home adults are common, once they couple up, they tend to move out. That's less true in Australia, but at the same time families seem to be able to cope with it.

[axollot]

8. I purchased my 1st home in Australia in the early 90's - during the

recession. Yes our interest went up but we were making double payments for the 1st 5 yrs so we actually had paid down principal (we purchased on the Gold Coast at that). I miss home badly. While some things are more expensive as you mentioned - wages are livable. However, I found since living here for the last 10 yrs that the real cost of living is cheaper over all in Australia - but cars, petrol, beer, perfumes, appliances are more expensive - electricity, food and other basics were actually cheaper than the US.
There are many things in the US that make me want to run, quickly back home. My eldest son (20) would also like to go back and he has a decent job here in the States. My youngest age 7 - deserves a better chance at life, education etc she is one of the reasons I want to go back to Queensland. (yes, fellow banana bender).

And while cars/petrol are expensive - public transport is widely available and very reasonably priced. Before moving back to the US (my ex was stalking me and threatening my life) I had sold my car and walked to the shops. I'd take a taxi to get back with groceries or use the delivery service and walk back home. I miss my life there though.

Cheers
Sandy

[MrModerate]

12. Australia has a lot to recommend it -- that's why I'm here right now . . .

And I'm far from certain I'll ever return to the US. Not so much because of prices, but because of socio-political factors.

[Fool Count]

15. As relatively new arrivals from the US ourselves (6 months ago),

we love pretty much everything in Australia, but the housing prices are positively out of control here.
There is no way in hell they will continue to go up, as everybody here seems to believe. Simply no way,
people are not going to spent half their income to pay the mortgages.

[Fool Count]

5. Well, nobody was keen in the US on Dr. Roubini either.

And look at him now, he is an international superstar. This tired "housing shortage" argument can
only go so far. Home prices in Australia are already at quite ridiculous levels. People are going
into debt to buy houses they can barely afford, without even a benefit of a fixed and predictable
long term interest rates. No matter how scarce the housing is, people won't be buying it if they
can't afford to buy. And most of them already can't. Even for those who can, it already doesn't
make any economic sense to buy. I am renting a $500,000 house in Brisbane for $400 a week. That's
4% return on investment even before subtracting the owner's expenses and factoring in less than 100%
occupancy ratio. I can get a better return on my investment by opening a savings account. Why in
the world would I want to buy a house? Only because I may believe that it would keep appreciating fast.
When the speculative expectation of price increases is the only rational reason to buy, that's how
you know the bubble is about to burst. I may go with your assessment that housing pricing will remain
high for the "foreseeable future", but if we know anything about economic predictions, it's that
this "foreseeable future" very rarely covers more than a few months. When a median house price is
getting close to ten times the median salary, it is time to sober up a bit.

[MrModerate]

11. Home ownership is not solely based on return. There are all sorts of . . .

noneconomic, social factors involved. They drive home sales as much as anything else.

There are also generational issues that might make ownership more attractive. The house I live in is probably worth 750K-plus (although it needs about 50K of work were the owner to attempt to sell), but the owner acquired it from his in-laws for less than 300K when they decided to go for a treechange following retirement. And I pay $670 a week. While this situation is only a fraction of the market, it's a substantial fraction, and needs to be factored in.

[WriteDown]

6. Wow....

Is home ownership uncommon down under? That is quite a penalty. I imagine that house flipping is unheard of.

[muriel_volestrangler]

4. His site here looks pretty convincing

http://www.keenwalk.com.au/

That looks like a bubble to me.

[depakid]

13. Kene's track record over the years is laughable...

The guy's been a semi-regular on the 7:30 Report, and if one wanted a good way to increase their odds in a bet, it would be by following his "advice."

Here's but one of many examples:

http://www.abc.net.au/7.30/content/2008/s2385821.htm

Me, I tend to listen to folks who get it right- and whose logic makes sense in context and takes into account local factors, including those Mr Moderate brings to our attention above.

(One might also note that Keen was predicting disaster from the very stimulus efforts that kept Australia out of recession, saving the retail sector and many small businesses in the process).

[Oregone]

9. Add Canada to that list

Both countries have seemed a bit resilient throughout this downturn, showing strong jobs numbers in the last few months. And its all about to end. Canada's step to reform their lending rules is the first step of the bubble bursting hard.

[Fool Count]

14. That's because both countries, unlike the US, have sound and tightly

regulated banking sectors. As much as canucks and aussies love to whine about their "big three" or "big five" screwing them
over, that ability of big banks to extract solid profits without engaging in questionable lending practices and resorting to
opaque financial instruments was the main reason behind the two countries' economic resilience.