Those few warning of a housing crash are “scaremongers” – now playing out in Australia.
By Lindsay David, Australia, founder of LF Economics:
Since the end of the Second World War, there have been more than 40 housing bubbles across the globe, and they all ended with a hard landing. One of the housing bubbles already written in the history books as one of the greatest of all time was the Irish housing bubble of the last decade.
And when you look through these history books (or YouTube for better entertainment), you find a remarkable trend between those who identified or failed to identify the forthcoming collapse of their housing bubbles.
And just as concerning for Australia’s case, it’s the arguments by those who deny the existence of a housing bubble in an attempt to justify the high and rising price of real estate. More specifically I am talking about Australia’s mainstream economists & bankers, politicians, central bankers, construction industry representatives and any other individual whose job it is to spruik the price of property and deny the existence of a housing bubble even when the data states that a housing bubble exists.
On the other hand, those few who argue the existence of a housing bubble always have one issue in mind: the irrational amounts of debt that households accumulate.
Now taking just a few minutes out of your life, watch this classic debate in Ireland between two Irish economists just before its housing market crashed. And ask yourself if the gentlemen sitting on the left (Jim Power) is making any similar arguments to justify the high price of housing in Ireland that the mainstream economists in Australia have been drilling down the throats of Australian society:
[Wolf here: this video would be hilarious, now with hindsight, if it weren’t for the many tragedies the subsequent implosion of the Irish housing bubble caused . And of course, we’re now hearing the very same stuff once again in the US.]If you believe the current state of the Australian housing market is any different to Ireland’s “Celtic Tiger” a decade ago, then you might want to think again. As per Morgan Kelly’s argument in the debate, rents were not keeping up with price growth, and Irish people were mortgaging their lives away. Same appliers in Australia. And believe me, Australia has built more residential dwellings than physically needed.
So why do economists get it so wrong when it comes identifying housing bubbles? It’s called “vested interest.”
Except for the local housing markets that have already crashed across a host of mining towns, Australians are currently caught up in the myopia of a housing bubble. Not one mainstream economist has come out of their shell to call it. And the same economists claim that those who are warning of a housing-price crash are simply “scaremongers.”
Yet these mainstream economists never analyze the data and facts these apparent “scaremongers” present to the debate. Those who are claiming that Australia will experience a crash in housing prices (or a housing bloodbath in my case) all are arguing the exact same issue that mainstream Aussie economists will not go near discussing, and that is the roughly $2 trillion in liabilities on the balance sheets of Australian households.
This is quite frankly a sum of debt that will never be fully repaid by Australian households to their creditors. And for house prices to rise or remain stable, homebuyers need to borrow a greater sum of debt than the previous round of homebuyers. If for whatever reason they can’t, then that’s it.
The unfortunate reality in Australia is that mainstream economists are more often than not either employed by, or are outsourcing their services to clients that have too much skin in the housing market game.
Lets face it, if an economist from a major bank were to stand up and publicly say something like, “Australia is experiencing a housing bubble, it will burst and send the Australian banking system broke,” there is a good chance that the economist would one way or another lose his or her job.
Because our banking system has been fueling the debt fire while the Reserve Bank of Australia and financial regulator APRA drive the Titanic Australian housing market into an iceberg. This is what happened in Ireland, and that’s what will happen across this whole nation in the not too distant future as the economic conditions continue to deteriorate further.
So while the mainstream economists of the Bogan Empire continue to preach the Celtic Tiger mentality, don’t expect anything different than the same end result. That is a bust. By Lindsay David, founder of LF Economics, author of Australia: Boom to Bust and Print: The Central Bankers Bubble.
Is Australia’s current downward spiral “the result of Libs talking down Oz Economy?” Not quite. Read… Australia’s “Black Swan Moment”
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Absolutely great article.
And that gentleman in the hilarious video… anyone knows what’s he doing these days? Is he perhaps pitching Glencore stocks?
Thats because most economists are an extension of the government, banks, and industry “cheerleaders.’ Ponzi schemes require confidence and the economists provide positive reinforcement for the desired scheme. Its hard to deny a train wreck after it occurs.
I just read a story about a tech guy living out of his truck in the company parking lot in SF. These stories are not going to help attract more employees to the area. Eventually the companies themselves will look for more affordable places to relocate, and that will be the end of the bubble in SF.
I think before that happens, the SF tech bubble will pop, and there will be layoffs … oops, there already are layoffs.
Absolutely, my wife’s startup is moving out of SF. Rent is very high and there are too many kick-backs you have to pay to ‘His Majesty’s’ Mayor Lee’s office to get stuff done.
Wolf,
I drive by facebook campus everyday. Judging by the traffic, there have not been enough layoffs there to matter….yet. I will let you know if that changes.
Thanks. I’d think they’d stop hiring first before they start laying off. Facebook is doing well and has a ton of money, so I don’t expect a huge move there.
But there are thousands (?) of startups that are not doing well. And there’s a whole generation of older former startups like Twitter or the gaggle of ad tech companies that aren’t doing well either. And then there’s old tech like HP and kind-of-tech like Intuit, and they’ve been laying off people for a while.
But advertising money from startups make up a chunk of FB’s ad revenues – so when startups are slashing their ad budgets, that’s something to watch in terms of FB.
If it’s a comfort; most mainstream economists do see the bubble after it bursts.
One other thing to remember; you never get ahead if you are bearish, negative, or voice unconventional views. People just like to hear good comforting news – that everything will be all right.
You can add Uruguay to the list of countries with a real estate bubble. Not only in residential but also office space. I noticed that some real estate brokers are silently reducing their asking prices since September (The moment that Brazil had it moment with destiny). Montevideo is like a zombie. The historical part of the town looks like a hell hole with overpriced, not maintained, speculative properties. Manny are empty since the last collapse in 2000/2002. People have not been able to maintain their properties in Montevideo in general. Now quick jobs are done to improve the appearance of the building in the hope the appearance is more in line with the price asked. But a little bit paint don’t offset 30 years of no maintenance. Banks are leaving Uruguay and leaving behind big empty offices in the historical part of the city. Facta have its results :) The last 3 years we saw a big building spree. Last census in 2011 said that Montevideo was losing people and had more than 50.000 empty buildings. Since then another few thousand have been built by project developers. Besides them you have a lot of cooperatives here building too. Population is aging too. Most old people lost a lot during the last crash and are completely depending the state average getting USD 500 a month. Can tell you that from USD 500,00 is very hard to life in the city of Montevideo. Now the economy goes down maybe young people start to leave again to North America.
So it sound like Brazil, then? Robert Shiller warns of housing bubble:
http://www.bloomberg.com/news/articles/2013-09-05/shiller-warns-of-housing-bubble-after-225-surge-brazil-credit
It is almost a universal story; property prices outpacing incomes, and the difference is being bridged over by debt.
Long time reader, first time poster.
Sweden is also going to experience a massive housing market crash within the next few years, the second in 25 years. I’m old enough to have lived through the last one, and I fear this one is going to be much worse. If it’s any consolation to the writer, the arguments sound exactly the same here.
In the late 1980s Sweden experienced a housing bubble. Prices in the best part of Stockholm (Östermalm) peaked at SEK 20,000+ per square meter. A couple of years later (in 1993) I bought an apartment in the area for SEK 11,000 per square meter. Since then prices have skyrocketed. True, they stopped rising for a while in connection with the 2007 U.S. crash, but then just kept going again. The average price in my area is now SEK 110,000 per square meter (yes, ten times what I paid 22 years ago). I have been warning people locally of this for years, but prices just keep rising. Once another commentator pointed out that my apartment had risen by SEK 1,000 (app. USD 125) day in and day out for 22 years. Does that seem sustainable to you?
At this moment, I must admit I’m scared. People here are not paying off their mortgages, preferring to “rent from the bank” since their loans are so huge they will never be able to pay them back anyway. I’m taking all of my money out of Swedish stocks at the end of this year, keeping it in cash in various currencies and USD funds. When this market comes crashing it is going to take the Swedish krona along with it. It is not going to be pretty.
Most economists survive on grant money that they request to fund studies of current situations. The authorities control those grants and the awarding of them. If you live on hand outs, you very quickly learn not to question those whose hands feed you. Nowhere is that more true than in the US. The Fed has amazing amounts of largess to distribute to the faithful or at least to those who understand the facts of life. There is a powerful incentive to stay off the Fed’s doo-doo list. Living, while increasingly expensive is still a popular choice.
Emailing from Broken Hill, NSW…famous for BHP, and Mad Max….
There are 1400 places empty or for rent in this mining town, with some of the most affordible rents I have ever experienced in Australia. Talk about a ghost town…
Having lived though the US boom and bust, there will be some opportunites here in Australia, and it take about 2 years once the boom starts to really get some fantastic firesale prices.
But remember, once properties start falling, it will take the stockmarket with it….so “Stay Hungry, and Stay foolish”
Australia has a very nasty cultural habit of personally savaging and ostracizing anyone who isn’t “with the team” on the agreed message. For a country that bangs the drum so loudly about how individualized they are, I haven’t seen another country (including Japan) that has such uniformity in worldview. It stems originally from the bullying in the schoolyard and the need to go along with the power set to survive.
So with gross rental yields of 3% (near 0% after costs) and prices jumping 10-15% PA (compounding) for years on end, everyone KNOWS it’s unsustainable yet none dare whisper heresy.
Westpac – one of Australia’s largest banks has raised it’s mortage interest rate .2 basis points in the last few weeks even though the Australian Reserve Bank has shifted interest rates.
It was reported that the Australian Federal government was approving the mortgage rate increase. It’s arguement that Aussie Banks must be strong and have strong reserves behind them in case of some economic event.
What does the Aus government and the banks know that we don’t?
The land rats and their shills are talking up the housing market however overseas investment houses and a few local economists are warning of a servere Australian economic downtown in the near future.
There is one sector the land rats are not praising. The oversupply of ratty city apartments.
One of the best ways to measure the housing sector is to track the aggregate value of residential real estate. For example, the Economist posted this sobering stat in August 2006: The aggregate housing value in the USA on 1 January 2001 was $14 T, and five years later on 1 January 2006, it was $23 T!
You do not add 9 trillion to 14 trillion in just five years with realistic appreciation and new construction.
With some regions like the Bay area being outliers, the USA’s aggregate value is close to where it was a decade ago.
I live in Canada and I hear the exact same arguments here about why this run up in housing prices, especially in Toronto and Vancouver, is sustainable and is not a bubble. It’s impossible to predict when it’s going to end, but if history is any guide it will end eventually and it will end badly. A lot of Canadians and Australians will be in for a rude awakening.
Lower Southampton TWP in Bucks County PA has a population around 19k and is about 9 sq miles where I grew up. Now has 72 homes in foreclosure right now. It borders N E Phila which has one of the most highest over valued R E markets in the country who’s home values went up over 10 pct this year and the city is now shedding jobs by the thousands every month. Anyone see a problem here other than me?
I think it is more than just brazen “vested interest”. No one could possibly be so disingenuous, so lying and so blind merely for personal gain, and at the loss of one’s own credibility and face…
No, it’s more than that.
These people are mainstreamers. As such, they are Keynesians. And like all Keynesians, they do not believe “bubbles” can exist. Diehard Keynesians are irrational optimists; “misallocations of capital” (“bubbles”) simply cannot exist in their world, in which “growth” is measured by aggregate spending NO MATTER what that spending is on…
EVERYTHING IS AWESOME!!!! is all they can say…
“and at the loss of one’s own credibility and face”
and right there is the fucking rub, these people never lose face, Jim Cramer was pitching bear sterns right up till they went BK and this cock sucker is still on TV and still taken seriously.
NOBODY CARES IF YOU ARE WRONG WHEN YOU PITCH THE CORRECT MEME TO THE SHEEP!!
sorry for the language but i’m pissed of, i’m pissed off because the last time this shit crashed i personally knew somebody that lived in their house with out making a mortgage payment for 48 fucking months………and their property taxes got paid the entire time. And now here we are again with the same shit happening all over again AND there will be some dead beat that will live rent free for months AGAIN and Cramer will be wrong AGAIN and nothing will happen to these assholes!!!
i feel like such an idiot for living within my means and paying my bills on time every month.
please, somebody stop the madness!!!!
What is the banker’s main product?
Debt
How do banker’s make profit on that product?
Interest
If they can engineer an asset price bubble in any static asset they can shift more of their debt product and make more profit on interest.
This will crash and burn in the end but housing bubbles normally have a long cycle time before some external event pops the bubble, usually rising interest rates.
With individuals within the banks being paid salaries and bonuses their are no mechanisms for them to actually lose.
The big problem with applying Game Theory to markets where major participants can’t actually lose.
So all the incentives are there.
All it takes is for one organisation to start the ball rolling and they will start posting bigger profits than their competitors.
The pressure starts to mount for others to join in. A couple of years later and everyone is in and the music starts to play:
“But as long as the music is playing, you’ve got to get up and dance. We’re still dancing” Chuck Prince
One day the music stops but the individual players have collected their salaries and bonuses.
One day the music stops but the individual players that caused it say “nobody could have seen this coming” and then they get bailed out.
and then they smile real big for the camera.
cause, as you know, they are doing gods work!
So what’s the best play here? This reads so true and has been a topic of among friends for a while now. Any suggestions on how to play this if I currently don’t have any exposure to AUD? Thanks!
Re: losing your job if you are a realist. In his book Boomerang Michael Lewis ( The Big Short) describes the Irish crash and Morgan Kelly (interviewed)
A young analyst with Merrill Lynch DID describe the incredibly loose lending of the three Irish banks. He was a bit of a nerd who had trained as a zoologist before going into finance. (I guess his missed the bit about survival of the fittest)
His report was hot reading on line for about two hours until Merrill got calls from the banks and developers screaming.
They pulled the report, redacted most of it and apologized individually to all upset.
Next year they fired the analyst.