Australia Starts to Spot the Bubble Chickens and they Appear to be Roosting

There seems to finally be an emerging awareness amongst traditional media in Australia of the intractable problem caused by our epic housing bubble coinciding with the end of the commodities and mining investment boom. In the words of certain pundits “our economic leaders have been managing a bubble, not an economy”. An increasing chorus of recent warnings from the Murray financial inquiry, our top regulators, bankers, international ratings agencies, prominent business leaders and lobby groups, and swelling ranks of previously bullish economists are calling time on our dream run. Some very notable examples in the past few weeks alone: 

It has become increasingly hard to ignore the self-evident truth that the powers that be are finally running out of levers to pull. Our national income and standards of living are falling thanks to the unwinding commodity price boom, China is going pear shaped quickly, unemployment is rising with the mining investment phase over and the slow death of manufacturing, business investment, productivity and competitiveness are near record lows, confidence is in the gutter, and the only thing left that was meant to save us – housing construction, is completely hamstrung by the dangers of our record asset prices. The puzzle no longer fits together, and our regulators and leaders know it.

The chronic imbalances are beginning to come out of the wash for real. Why did we choose to ignore a decade or more of very serious warnings? The dangers of our credit fuelled speculative housing bubble and the re-structure of our entire economy towards “houses and holes” at the expense of productive enterprise have been clear for at least that long, and there have been warnings to match. Why did we refuse to listen? Because like all people faced with spectacular emergent wealth (in our case mineral resources), we chose the path of immediate gratification and greed, and unserviceable debts later. And it is these staggering private debts that form the giant millstone around our necks as we enter the largest terms of trade and business investment downturn in a very long time.

There were chances to pursue genuine reforms to seek a rebalancing. But thanks to our exceptionalism, a seemingly ingrained culture of indifference to risk, political and regulatory corruption at nearly all levels, a circle-jerk of mainstream economists and journalists content to pat themselves on the back at any opportunity, open hostility towards and patronisation of “doom-sayers” for pointing out obvious risks, and worst of all a general discarding of egalitarian values in favour of mythological housing wealth and the evolution of our disturbingly inequitable tax transfer system that is the blood in the veins of the Frankenstein; we have failed every single opportunity to avert disaster.

And just like every other moment in Australian history where a private debt bubble crippled our financial system and brought our economy to it’s knees (the worst being the 1840s, 1890s and1930s), and recent examples from all over the developed world, our leaders and regulators have set themselves up to be immune from blame and prosecution. The have given us countless dog-whistle warnings about the problems they created, while simultaneously working to keep the illusion alive a little longer, simply so that they can inevitably give us the utterly contradictory and false chastisement that “No one could have seen this coming, but we warned you not to get carried away. This is your fault.”.

Worst of all, unless we educate ourselves as a population now, and push hard for necessary reforms now, nothing will change. Years after the bust, we will be sitting around trying to figure how to unlock the next speculative land cycle, a cycle that in this modern age of neo-liberal deregulation, is the primary driver of the business cycle and the entire basis for economic fortunes and failures. The recent failures of political and economic leadership elsewhere in the world is proof that this cycle just gets repeated.

These countries have learnt nothing from the GFC because they don’t know how else to run a modern economy. And while we lecture other developed countries for failing to learn the lessons that were thrust into their laps, here in Australia we have elevated our collective economic egos so far into the stratosphere the we have effectively taken a giant insulting urination on the whole textbook of economic history. And nothing is more painful and humiliating than being caught with your pants down when the bully of private debt finally comes to collect our lunch money.

Let history record that we were warned. Over and over again. I’ll leave you with this frightening chart from AFR’s Chris Joye:

 

Australia, the largest housing bubble in the Western world.

 

For those that do wish to learn from history, an excellent place to start is one of the recent illuminating texts on the largest bubble in Australia’s history, books that will no doubt take on legendary status post-crash:

Bubble Economics: Australian Land Speculation 1830-2013 by Paul D Egan and Phillip Soos

Australia: Boom to Bust by Lindsay David

Also, check out my links section to find out about some of the many tireless economists, researchers and writers that have been warning us for many years.

4 thoughts on “Australia Starts to Spot the Bubble Chickens and they Appear to be Roosting

  1. Great post Matt, reposted it to the Abolish Negative Gearing facebook page:
    https://www.facebook.com/abolishnegativegearing

    I also like that you are providing a summary/list from different sources.

    You have inspired me from doing that petition and saying the whole thing in a really coherent way. About 10 years when I was researching to buy an investment property I concluded that the biggest risk would be young people getting together and communicating how dodgy the whole game is, so hopefully that time is getting closer.

    Cheers,
    David

  2. I totally agree with these sentiments here.

    But I have a caveat. The graph you showed does indeed show a bubble, but not one ready to pop. I would be surprised it it popped this year. 2015 is more likely.

    Go behind the scenes. Real estate agents willing to spill the beans will tell you that (a) there are now increasing numbers of genuine buyers in the marketplace, and (b) a heck of a lot of these are investors.

    I suspect that we have yet to see the full extent of SMSF’s piling into leveraged real estate, see “Here comes the SMSF blow-off top”. This may yet create a parabolic rise in house prices.

    It’s also possible that more foreign nationals will pile into Australian real estate in order to escape the uneasy economic and political environments in their own region (e.g. China and Europe in particular).

    We could point to NZ’s macro-prudential controls. But, really, it hasn’t made much of a difference at all, because the above factors — retirement investors and foreign capital transfers (including Australians) — outweigh the domestic first-home buyers.

    But one thing is entirely clear. As soon as first-home buyers are priced out of the market, this spells the beginning of the end, regardless of government actions or inactions. See the video at “Nightmare vision of impending property crash”.

    Keep up the great work!

    1. Thanks FC, you may well be right about that. To be particular though, I’m not in the business of predicting when the whole house of cards will come crashing down. This article is specifically addressing the growing list of warnings from top officials and business leaders who might previously have been sanguine about our risks.

      Whether or not the bubble bursts tomorrow or in 3 years is besides the point. We have a bubble, and regulators and leading economists are now warning about it. Worse, we have possibly the largest housing bubble in the Western world (as shown by Chris Joye’s above chart), while also standing on the precipice of the largest mining and commodities downturn in a very long time, and that is why the official warnings are coming now.

      When I say “calling time on our dream run”, it is this emerging economic reality that I’m referring to. There is almost no way that we can avoid a severe correction now, and the fact that these pundits are finally appearing worried should have us all listening very closely. Pointing out massive intractable risks is not a prediction of timing – simply a statement of fact.

      P.S. I think you’ll find that first home buyers are already priced out of the market – with a record low 9% of transactions being for FHBs. Doesn’t mean that the bubble can’t go on longer, but it certainly suggest that when the worm turns, there will be a lot of “investors” ready to stampede the exits. These people will not be interested in riding out capital losses given that speculative capital gains are the only reason for such “investment” at this late stage.

      1. Yes!

        The fact that first home buyers are now essentially priced out of the market is a very clear indication that the beginning of the end has begun.

        Add to that the unanimous statements from the senior economists of each of the Big 4 that we are not in a bubble, is actually the strongest indication that we are in fast approaching the edge of the cliff (The bubble will pop, because the experts say there’s no bubble).

        In addition to addressing the policies that have fuelled this bubble (or done little to moderate it), we need to be looking to the future, i.e. post-bubble. In such an environment, banks will be ultra-cautious, imposing higher interest rates and demanding greater deposits. Will first-home buyers be much better off?

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