What will pop the property bubble?

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Now that it is undeniable that Australia has a raging property bubble, we’re moving into a new phase of MSM spruik that that defends the sustainability of said bubble, a permanently high plateau as it were. Fairfax uses UBS today to suggest nothing can bring the wonder down:

Overall, housing is showing some bubble-like features, but it lacks a trigger to pop it near-term,” senior economist George Tharenou said.

A rate hike by the RBA will be key to a price correction, said Mr Tharenou, as home prices growth was hit by interest rate increases in 2003, 2007 and 2010.

“Those downturns were only triggered when the RBA hiked,” he said. “Historically the key catalyst for housing approvals to peak is RBA rate hikes; not excess supply or unemployment.”

Most economists at Australia’s leading banks and financial institutions do not anticipate a rate increase until the end of 2016 or beyond.

One thing is certain, official interest rates will not be the pin. But the following will:

  • rising unemployment as mining-related capex craters, the car industry shutters, and dwelling construction begins to decline;
  • an oversupply of homes (particularly apartments) caused by the run-up of strong dwelling construction in the face of falling population growth;
  • near record low affordability as prices have outpaced income growth;
  • growing regulatory restrictions placing downward pressure on prices, including tighter macro-prudential controls and greater monitoring/enforcement of foreign investment;
  • the West Australian crash pulling down national sentiment, and
  • a likely external shock that raises the funding costs of Australia’s banks and non-bank lenders, preventing rate relief for households during the next recession, especially as the sovereign rating is stripped.
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This list can be broken down into two main points. The first five bullets drain Australia’s stimulus firepower over the next eighteen months then the last point raises bank funding costs even as official interest rates fall during a shock, constraining their impact.

There will be all sorts of crazy efforts to support prices with fiscal policy, and they may even work for short periods, but we are basically out of ammunition.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.