“No economic rationale for” Aussie housing

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By Leith van Onselen

ABC News published an interesting morsel on how foreigners view the Australian housing market:

While the Reserve Bank warns of risks to specific markets, an experienced financial risk analyst recently returned to Australia from the Washington-based Institute of International finance said foreigners are puzzled about the entire Australian housing market.

Deloitte partner Kevin Nixon said most analysts overseas are extremely sceptical that current Australian prices can be maintained, relating his experience at a meeting of central bankers and financial industry representatives.

“One of the central bankers present asked: ‘What’s going on in Australia?’ to which the research economist replied: ‘We’ve given up thinking about Australia. There is no economic rationale for it’,” he said in a Deloitte roundtable on the Australian mortgage industry.

However, Mr Nixon believes even a 30 per cent home price fall would not be completely catastrophic for the financial system.

“It would hurt, but for a lot of people it would just eat up their equity on paper and, as long as they don’t lose their jobs, they can continue to service their loans”.

One of the better explanations for Australian housing that I read in recent times comes from Gerard Minack, who earlier this month wrote:

I think the major reason why Australian house prices are high has been the willingness and ability of Australians to leverage up to buy homes. Nothing else, in my view, explains the breadth of the bubble.

As is well known, large cities tend to be more expensive than small cities. Australia has expensive large cities by global standards. But the truly jaw-dropping prices are for small- and mid-sized Australian cities. Every city in the Anglo world with a population of less than 100,000 and house prices over five times median income is in Australia (Exhibit 6).

6

The world’s most overvalued banks. Unprecedented investor demand. Record high housing valuations. A slowing domestic economy facing a huge structural adjustment. No worries, mate.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.