Game Over for Aussie Property Bubble

When George Soros speaks out – generally traders take note. After all, he is a household name.

However, there’s another guy that we should be paying attention too, and while he’s not widely known to the public, to institutional brokers, he is.

This man has a knack for picking asset bubbles, and as a result he pulls his clients’ money out of the areas where he believes a problem is growing.

Way back during the heady days of the tech boom, in the late nineties he saw the tech bubble growing and knew it was a problem. So he moved his client’s portfolio’s away from stocks that would be exposed when the tech bubble burst.

A move, which in the long run actually cost him more money than his client’s would have lost.

You see, he picked the tech bubble in 1999 and started redirecting his client’s interests so the portfolio wasn’t too one sided. It was another two and a half years before the tech bubble popped. Which meant his client’s missed out on the final big tech rally.

However, he stands by his decision to manage his client’s money the way he did in the lead up to the bubble. He knew it was irresponsible to continue when he could see the problem growing.

And, he did the exact same thing with the US property boom that burst. He saw it coming as early as 2004.

So this almost legendary bubble spotter now has his sights on the Aussie property market.

While he admitted that every bubble is unique and could go on forever, Australia’s property bubble is just one of two refusing to pop at the moment. In a recent interview he said that if Australia’s housing market didn’t return to normal “it will be the first time in history”.

Let’s be honest, it’s unlikely that the Australian property market will defy history.

But Grantham is just another industry prophet that has pointed out that what’s happening in our housing market can’t be real. And even more, he’s well aware that it can’t be maintained.

As he pointed out yesterday, the average Aussie home is seven and a half times a family’s income which he believes is exactly what makes Australian house houses in bubble territory. Because house prices are ‘typically’ three and a half times the household income he said that this “… suggests you’re twice the size you should be”.

He’s even gone so far to say that our property prices need to fall 42% to return to the long term trend. That number is very close to doom and gloom economist Steve Keen, who believes property prices will drop by 40% over the next ten to fifteen years.

Yet our own central bankers repeatedly say that Australian homes aren’t in the middle of one big bubble.

In fact just yesterday the RBA’s deputy governor Ric Battellino responded to the bubble comments by saying “People feel that house prices in Australia are quite high and that’s quite often because the ratio of house prices to income are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated”.

“But if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”

And it’s true, we constantly here about how unaffordable any inner city suburb is around the country. It doesn’t help when the media hype up that you simply can’t break into the property market within a twenty kilometre radios in any capital city.

But is Battelino right about the country areas?

As an example, Ballarat in central Victoria, had a median of $257,000 in May this year. And based on the latest census data from Australian Bureau of Statistics, the average weekly household income for the suburb is $832, or just over $43,000 annually.

While you can see the average house price is low, so is the average income. In fact it means that these residents have a home that is 5.9 times the household income. Okay, so that’s hardly a bubble figure there, but it doesn’t make housing anymore affordable like the RBA want you to believe.

Property prices in country areas have benefited from the ten year property boom that the country is experiencing. But even though Ballarat is just one example of a country town, these figures still don’t make housing look any more affordable.

In fact there are many companies around at the moment, offering their data to the media, suggesting that house prices are only 4 – 5 times the average household income.

But here’s the thing. For these companies, their livelihood relies on you believing that housing is affordable and you better get in now before it’s too late.

Let’s be honest, now that the holes are starting to show in the housing market, this sort of spruiking is becoming pretty quiet.

Funnily enough, this has had the spruikers suggesting this is a ‘cooling period’ for the property sector.

In contrast, Steve Keen has said that Australia is entering a deleveraging period and that this is only the beginning.

The argument of bubble versus non bubble almost doesn’t matter anymore. Most Australians believe we are in a bubble.

So the real question isn’t ‘Are we in a bubble?’, but why are the so called ‘experts’ ignoring the persistent bubble warning? And let’s pretend that for the moment that the RBA are the experts on the Australian housing market.

Look, all of those overseas that are watching the Australian property market have nothing to lose from our property bubble going ‘ka – boom’. And for Keen, it may mean that Rory Robertson will have to fulfil his part of the now famous bet.

However, no matter what public spin the RBA release, they have to be aware of the catastrophic effects of a housing crash in Australia. It’s no secret that the big four Aussie banks have over 50% exposure to the mortgage market in Australia. Even a small property crash will shake our ‘too big to fail’ banks.

And the RBA have what one market spectator called ‘rammed’ interest rates up so quickly in a desperate bid to slow down our property bubble. In fact it’s just a thinly veiled attempt at stopping the bubble from popping.

But this is where Grantham’s, comments are interesting. He believes our housing bubble is very closely linked to our interest rates. And that eventually rates will get too high for people to keep paying.

“Sooner or later, the rates will go up and the game is over.” He said.

He’s not referring to interest rates hitting the teens, he means as low as 10% to the customer. It was just over two years ago the RBA cash rate was 7.25%. To you as the mortgagor, you were probably paying close to 10%.

And now, since the ‘GFC’ banks have a much higher margin they place on top of the cash rate. In fact in some cases, the banks’ mark-up on the cash rate can be as much as 2%.

While many have scoffed at rates reaching this level again, it’s not unlikely, and certainly no reason to discredit what Grantham is trying to explain to Australians.

Really, Grantham is just another person that joins the long list pointing out the Australian property bubble.

But despite that the bubble keeps expanding. You can’t help but wonder why all the experts are ignoring these warnings. It wouldn’t be anything to do with vested interests would it?

Regards,

Shae Smith
Assistant Editor

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Tagged as: aussie property bubble, property boom, property bubble, property market, property prices, Property sector