Here is a different perspective on what drives Australian housing prices and why they are unsustainable. Resilience is being ok after a housing prices bubble bursts!

Extract from: Beware the housing bubble by Paul Syvret from The Courier-Mail February 12 2011

When it comes to the Australian property sector .. three questions:

1: Is Australia’s housing bubble bigger than the one in the US?
2: What would trigger a correction?
3: Who would get hurt the worst?

One of the men .. for answers is possibly Australia’s most renowned housing bear University of Western Sydney Associate
Professor Steve Keen an economist who eschews most of the neo-classical economic doctrines in favour of a credit-oriented analysis of demand.

Keen has been calling a top (and predicting a long and painful fall) for the housing market for some time.

His answer to their first question pulls no punches: “The Australian housing bubble is categorically larger than the US.”

[b]At the core of our housing bubble Keen argues is an explosion in debt combined with a market further distorted and overheated by government incentive payments (which were turbocharged by the Rudd government’s doubling of grants during the global financial crisis).[/b]

Keen says that in nominal terms Australian house prices have increased 600% since 1986. In the US they peaked at about a 350% increase in 2006 before the music stopped.

The same story applies to real house prices (which adjusts the figures for inflation). In the wake of the US mortgage crash the index is about 160% above its 1986 level. In Australia we’re sitting at about a 260% gain in real terms.

[b]”Though I apportion most blame for the Australian house price bubble to the finance sector there’s little doubt that the fuse itself was lit by the government’s intervention via the First Home Owners Scheme which began in 1983″ Keen says.[/b]

Keen says that on all measures Australian house prices are insanely overvalued particularly when judged on such measures as price-to-income ratios or price-to-per capita GDP.

“Spruikers claim that there have been significant demographic shifts that houses now are bigger and better than those in 1970 and so on.

However [b]all of the increase in the house price to GDP per capita index above its average has occurred since 2001[/b] when (former prime minister John) Howard doubled the First Home Owners Grant because of a fear of recession [b]and there has been no real change in Australian demographics since then[/b]” he says.

Keen also dismisses claims that demand and population growth are pushing price inflation arguing [b]the ratio of population to dwellings has been steadily falling[/b].

Indeed he says [b]the brief period when population was rising faster than housing stock between 2006 and 2010 actually saw prices weaken[/b].

“Population dynamics gave spruikers a good story but it wasn’t what drove prices up. [b]We’ve had a debt-driven housing bubble just as has the US and it’s the dynamics of debt that will determine when and how it bursts not demographics[/b]” he says.

And here is where the numbers get frightening.

Since the 1970s the ratio of debt per dwelling to price has increased 400% and [b]the ratio of debt to disposable income has increased by 800%[/b]. [b]Not resilient[/b]

“Ponzi schemes ultimately fail under their own weight because they involve paying early entrants more than they put in while producing no profits with high running expenses” Keen says.

“A debt-financed Ponzi scheme can however appear to work for a long time because the price of the object of the scheme in this case house prices can rise so long as debt levels per house rise faster still.

“That was the case in Australia. Property spruikers focus on the price increases and ignore the debt but the latter [b](debt) has risen far more than the former (price)[/b]. [b]Nominal house prices are up by a factor of 15 over 1976 but debt per house has risen by a factor of 55.[/b]”

Keen contends that while Australia doesn’t have the same “sub-prime” problems that brought the house of cards crashing down in the US “the level of mortgage debt actually rose faster and higher here”.

Reserve Bank governor Glenn Stevens told a parliamentary committee Australia’s household debt levels are high by world standards.

According to Keen easy debt -lots of it – is your basic ingredient in a bubble.

“What will bring this bubble undone is its very success. Having
successfully driven house prices skywards the cost of entry into the market is now prohibitive so that the flow of new entrants is drying up.

Since the scheme depends on a constant flow of new entrants this alone will bring it unstuck” he says.

Keen’s critics argue there hasn’t been the same sort of speculative housing construction boom here that the US experienced.

He says that’s true but adds: “In the aggregate now less than 10ยข in every borrowed dollar builds a new home. This does mean that there isn’t an overhang of newly completed properties on the Australian market.

“But conversely [b]the huge proportion of investors who have bought in solely to achieve capital gains means that the investor side of the market is very fragile. Any sustained pause in price increases means these investors face mounting losses.”[/b]

What of all the property analysts who may agree Australian house prices are overheated but say we are in for a soft landing with falls largely limited to a decline in real prices (and affordability improving as incomes rise) over the period of a few years?

“There has simply never been an asset bubble that has burst and gone sideways. Never” Keen says.