Getting Poorer as Australian Property Rises Higher

We don’t know much, but what we do know (or think we know) is that ‘Peak Australia’ is fast approaching the Aussie housing market.

And we’re now not the lone voice screeching loudly about it.

From Bloomberg:

Australia could further curb mortgage lending to investors as the impact of earlier measures wanes and Sydney and Melbourne house prices keep surging, Reserve Bank Assistant Governor Michele Bullock said.

“There is no doubt that the actions did address some of the risks,” she said in a Bloomberg Address in Sydney. “While the resilience of both borrowers and lenders has no doubt improved, the initial effects on credit and some other indicators we use to assess risk may fade over time. We are continuing to monitor their ongoing effects and are prepared to do more if needed.”

Bullock, in her first speech since taking up oversight of the financial system, stressed that while individual decisions by banks may appear reasonable, regulators’ concern is that together they could lower overall lending standards. The backdrop is one where Sydney house prices have rocketed 105 percent since the start of 2009 and Melbourne’s have also soared.

To emphasise the growth in debt, you need look no further than the following chart. It shows household debt to income. It currently stands at 186.9%, up from 126.2% in 2000:

RBA Debt

Source: Bloomberg

Yes, house prices have risen.

But while the mainstream often talks about the ‘wealth effect’ of rising house prices, this chart shows the opposite is occurring.

Rising house prices haven’t increased wealth (on average). Rather, rising house prices have actually resulted in increased debt levels.

In other words, the ‘wealth effect’ is a misnomer, if it’s supposed to mean that wealth has grown, because it hasn’t.

Instead, Australians have been lulled into thinking that the secret to wealth involves buying an expensive property, hoping it becomes even more expensive, and then selling it to someone else.

Unfortunately, it gets worse. Because if rising house prices led to huge increases in wealth, you’d expect those who sold to cash out and bank the gains.

Again, that’s not how it works.

Having sold, the property buyer ‘trades up’. They take their profits and use the cash to buy something even more expensive, with an even bigger loan…in the hope of being able to sell that at a higher price in the future.

And so the mania continues.

It’s the only explanation for why house prices have soared since 2009, while the ratio of debt to income has also grown.

We know that folks like to say a bubble doesn’t exist in Aussie house prices, but, for us, there’s no other explanation.

The Reserve Bank of Australia (RBA) should be worried about what’s happening in the Aussie housing market.

And it should be worried about the fading impact of its previous measures.

But the RBA must surely realise that it’s at fault for the current situation. Its very presence ensures that house-price booms or busts are inevitable.

As we noted last week, the singular way that the RBA manipulates interest rates up and down adds to the boom and bust cycle.

The RBA made a decision in 2012. Faced with a slowing economy and soaring house prices, the RBA decided that stoking a house price boom was worth the risk of trying to stimulate business investment.

It also no doubt figured that, if house prices continued to rise, it would help with the so-called ‘wealth effect’ — that rising prices would encourage people to spend…perhaps even withdraw equity in order to spend.

Like all government and central bank decisions, rather than leaving interest rates where they were, and allowing house prices to fall, they preferred to meddle.

The result now is an even bigger bubble, caused by even higher debt levels.

At the end of this quarter, Australia will have broken the record for the longest period of continuous economic growth. It has all been due to the easy-money policies of the US and China, which have helped fuel the commodities boom.

And not content with letting external players wreck the Aussie economy, for good measure, the RBA has used easy money to fuel the housing boom.

If anybody really thinks this is going to end well, to quote Kerry Packer, ‘they need their heads read.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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