When Herds Collide on the Yellow Brick Road

Flattr this!

2010 is shap­ing up as the year that the bulls and bears of the world’s last unpopped asset mar­ket bubble—Australia’s prop­er­ty market—will col­lide head on. The gap between those pre­dict­ing yet anoth­er bub­ble, and those pre­dict­ing its ulti­mate demise, has closed.

The bulls as always, empha­sise the “fundamentals”—population-fuelled demand out­strip­ping lag­gard­ly supply—and that “Aus­tralia is dif­fer­ent”.

The bears, as always, empha­sise lever­age— that the true fun­da­men­tal behind asset prices is peo­ple’s will­ing­ness to go into debt to buy them, in the belief that they can flog them for a lever­aged prof­it to the next Greater Fool. And on the “We’re dif­fer­ent because we have kan­ga­roos” the­o­ry, the bears con­tend that Aussies are just as sus­cep­ti­ble to a well dis­guised Ponzi Scheme as any­body else on the plan­et.

I doubt that most peo­ple realise just how dif­fer­ent Aus­tralia has to be to the rest of the world to sus­tain the bulls’ expec­ta­tions of yet anoth­er explo­sion in house prices in 2010. Not only do we need to defy a world­wide trend of falling house prices, we need to sus­tain that on top of a house price bub­ble that has already exceed­ed the best the rest of the debt-dri­ven world has achieved in the last 20 years.

Aus­tralian house prices rose by a fac­tor of five since the 1987 Stock Mar­ket Crash, far more than even US house prices. Even adjust­ed for infla­tion, Aus­tralian house prices increased by over 250 per­cent from 1987 lev­els. The best the US’s hous­ing bub­ble could man­age, before it burst in 2006, was a mea­gre 180 per­cent rise.

One irony in the bull case is that it relies on the mar­ket not work­ing properly—though the bulls push the “sup­ply and demand” line, they also rely on sup­ply fail­ing to do what it alleged­ly does in nor­mal mar­kets, and respond­ing to increased demand in a man­ner that tem­pers the demand-dri­ven price spike.

They also are hap­py to receive state hand­outs when it keeps the bub­ble afloat. 2009 was clear­ly the year of the gov­ern­ment-spon­sored house price bub­ble, with the First Home Ven­dors Grant dri­ving up sub-$500,000 prices by as much as $40,000. Those hap­py ven­dors then lever­aged their bonus $40,000 from pan­icked First Home Buy­ers into an addi­tion­al $200,000 or so on their next purchase—which inflat­ed hous­es up to the $1 mil­lion mark.

On Jan­u­ary 1 2010, that gov­ern­ment boost com­plete­ly dis­ap­pears, while the “right wing” of our schiz­o­phrenic gov­ern­ment eco­nom­ic man­age­ment sys­tem, the RBA, has declared that it might attempt to prick the bub­ble caused by the boost its fis­cal “left wing” gave to house prices this year.

So with one arti­fi­cial prop to the mar­ket removed, and the mon­e­tary wing of gov­ern­ment threat­en­ing to prick what the fis­cal wing re-inflat­ed, we’re down to the final bat­tle­ground: will Aus­tralians will­ing­ly increase their expo­sure to debt to finance yet anoth­er accel­er­a­tion of house prices, and will banks and lenders accom­mo­date them?

Lenders don’t have much room to add to lever­age in the Land of Oz. We’ve long left the Kansas of the 1960s, when banks required a 30% deposit—so that some­one with a $50,000 deposit could bid no more than $167,000 for their dream home. But hav­ing skipped down the Yel­low Brick Road of ris­ing lever­age, the Glob­al Finan­cial Cri­sis has stopped the Wiz­ards in their tracks. With­out it, we may well have cracked through the 5% deposit—which turns a $50,000 deposit into a $1 mil­lion pur­chase price.

Now there are rum­blings that, gasp, a 10% deposit might be required in future—and sud­den­ly that $50,000 deposit will only finance a $500,000 dream home.

That could be a night­mare for ven­dors this year—and of course for the Wiz­ards of Debt as well. I’ll almost cer­tain­ly find myself (and some friends) trekking from Par­lia­ment House to Mount Kosciuszko in late Feb­ru­ary 2010, since the final gasp of the FHB is almost cer­tain to dri­ve the ABS’s estab­lished house price index above its pre-Boost peak of 131. But I expect that as I come down from the moun­tain, Aus­tralian house prices will also be los­ing alti­tude.

Bookmark the permalink.