Tuesday, March 8, 2011

Is Australia’s Housing Bubble Bigger Than America’s?

Is Australia’s Housing Bubble Bigger Than America’s?
If you live in Australia, you’d better find some hearing protection: A massive popping noise could hit when a housing bubble of California dimensions explodes—and takes the whole economy with it. 

Australians don’t seem worried, but Californians used to feel the same way. Everyone from secretaries to engineers quit to become real-estate agents during California’s bubble years. For a while, they seemed like geniuses. Sell one house for $500,000, collect your 6 percent fee, and pocket a cool 30 grand. You don’t need to sell very many houses before you are sitting on a beach drinking mai tais at 3 in the afternoon. 

Now, the only ones sitting on a beach in California are those living in tents. With house prices down 40 percent from their peak in cities like Los Angeles—and with one of the highest jobless rates in the nation, record food stamp usage, and a budget that can’t be balanced even with massive federal handouts—California is dreaming of the good old days. Even the illegal immigrants are leaving.

Pay close attention, Australia. Los Angelification is coming to a city near you. Unaffordable Houses 

It is shocking how much Australia resembles bubbly, pre-bust California. 

The Australian Bureau of Statistics’ House Price Index shows that on average, house prices are up an astounding 20 percent in each of Australia’s capital cities compared to a year ago. Last year’s average $500,000 fixer-upper in Sydney now costs $600,000. In Melbourne, the median house price jumped by $116,917 to $549,980. Want to buy in Canberra? Get ready to fork over $495,000. 

Property prices in Australia are going berserk. Even remote Darwin saw house prices rise 17.5 percent. The slowest growth was in Brisbane—a sizzling 9.1 percent. 

These gains are compounded on top of last year’s average 13 percent rise. For comparison, for the 70 years leading up to 1995, house prices only increased by 3 percent per year on average. 

With prices so high, how can the average family in Australia afford to buy a home? 

Realistically, they can’t. Yet, like sheep to the slaughter, buy them they do. 

The Sixth Annual Demographia International Housing Affordability Survey: 2010 ranked 272 housing markets in Australia, New Zealand, Ireland, Canada, the United Kingdom and the United States according to affordability. Of the top 20 most unaffordable markets, 12 were in Australia—including three in the top five. 

Twenty-two out of 23 major urban markets in Australia were considered “severely unaffordable,” with the remaining one considered “seriously unaffordable.” Moreover, all but one of Australia’s smaller markets were considered “severely unaffordable” too. 

In Sydney and Melbourne, house prices have risen so high that it would take more than half of the average median household income to make just the mortgage payments of a median-priced home—and that doesn’t include upkeep or taxes. 

A typical house in Australia now costs 6.8 times the typical annual household earnings. 

Homes in Newcastle, Mandurah and Darwin cost around 7.1 times. Wollongong and Adelaide cost around 7.5 times annual household earnings. The most expensive areas are Sydney and the Sunshine Coast, where homes cost an astounding 9 times average household salaries. 

How bloated have home prices become? Historically, houses cost around 3 times household salaries (and for much of Australia’s history, there was only one salary earner in the household). Financial planners advise not paying more than 20 to 30 percent of your salary on all housing-related costs—around half of what Australians are paying now. 

Australian homes are so unaffordable that banks are now promoting loans in which borrowers never pay off the principle. Borrowers make payments, but will never—as in never, ever—pay back the borrowed money. ing Direct, Australia’s fifth-largest lender, is marketing these loans with the idea of creating a “mortgage partner for life.” In reality, unless house prices keep going up ad infinitum, these borrowers will be debt slaves for life.
Politicians are making the housing bubble worse too. Giving thousands of dollars to first-home buyers and reducing stamp-duty costs only encourages people who cannot afford a home to go into debt to purchase one. This artificial increase in demand has pushed prices even higher. 

Economic analyst Mike Shedlock says Australia’s housing bubble “exceeds the height of the bubble that long ago burst in the U.S.” (Market Oracle, February 3).
So why do people continue buying homes when they are so obviously overvalued and unaffordable? 

Greed !!!

It is all about the “greater fool,” says Shedlock. Just like the stock market, people are buying houses now because they think they’ll sell them for more later—hopefully a lot more. 

But inevitably, “the pool of greater fools runs out.” 

There is no one left willing to pay an even higher price in the speculation that prices will keep rising. 

What happens next? 

The bubble bursts. And the next thing you know, you look a lot like California: 

A landscape of broken banks, taxpayer bailouts, tent cities, rows of vacant homes and people living in their cars. 

Australia’s housing market has the hallmarks of a national bubble. 

The only question is, how long can it last?



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