What characterizes an asset bubble?
You need explosion of debt. Since the 1990s, Australian household debt has gone from less than 50 percent of annual disposable income to more than 130 percent.
You need a rapid increase in asset values. Australian house prices have risen by at least 9 percent a year over the past decade. This has far outstripped the growth in wages.
And you need the returns that asset brings in to plunge leading investors to no longer heed how much money the asset earns and focus purely on capital gain. Australian rental yields are now typically below 4 percent—lower than a bank deposit, but with more risk.
It is these facts that are leading international commentators, such as U.S. economist Jeremy Grantham and the research group Demographia, plus Australian economists like Steve Keen and Gerard Minack, to declare that Australian housing is way overpriced—some say by as much as 50 per cent.
But as Grantham says, the one thing every bubble has in common is, “Every one of them is considered unique and different.” Until they pop.
Let’s look more closely at some of the arguments pertaining to why Australia is different from the United States.
Housing Shortage
The first argument goes that Australia’s building industry has not been able to get its act together for years, owing to excessive government fees, long approvals processes, and more recently, banks becoming less willing to lend.
Australia is now desperately short of housing, unlike the United States, which had a building boom before the financial crisis. This will prevent house prices from falling too much because everyone has to live somewhere.
The problem is house prices in the United Kingdom plunged during the financial crisis and that market was not oversupplied. A surge in supply has often been associated with rising—not falling—values, such as Sydney in 2003, the Gold Coast, and much of the United States before the financial crisis.
No Buyers
When developers buy land, they look at the price of surrounding homes to work out how much they can get for their end product. This determines the pricing of the land, meaning that new stock is unlikely to be that much cheaper than existing stock. But as things stand, there isn’t much demand for housing at the current price level.
There is a lot for sale right now—a 69 percent increase from April last year, according to SQM Research—and in many capital city areas there are very few people going through open for inspections or bidding at auctions. People aren’t buying because housing is too expensive. It is questionable how much buyers would welcome new supply without substantial price falls.
